SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1996
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period from _______________ to ________________
Commission File No. 0-27646
GUM TECH INTERNATIONAL, INC.
-------------------------------------------
(Name of Small Business Issuer in its Charter)
Utah 87-0482806
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification Number)
4205 North 7th Avenue
Phoenix, AZ 85013
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (602) 277-0606
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
$.001 Par Value Common Stock
Common Stock Purchase Warrants
(Title of Class)
<PAGE>
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
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As of February 28, 1997, 4,948,740 shares of the Registrant's no par value
Common Stock were outstanding. As of February 28, 1997, the market value of the
Registrant's no par value Common Stock, excluding shares held by affiliates, was
$29,708,415 based upon a closing bid price of $8.62 per share of Common Stock on
the NASDAQ National Market.
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
The Registrant's revenues for its year ended December 31, 1996 were
$3,116,130.
The following documents are incorporated by reference into Part III, Items
9 through 12 hereof: None.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
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Introduction
The Company was organized in 1991 to develop, market and distribute
specialty chewing gum products under its own brand names and on a private label
basis for other chewing gum marketers. The Company's current chewing gum
products contain ingredients which it claims (i) promote weight loss (under the
"ChromaTrim" and "CitrusSlim" brand names), (ii) contribute to energy and
endurance (under the "Buzz Gum", "Power Gum" and "Love Gum" brand names), (iii)
alleviate certain premenstrual symptoms (under the "Repose" brand name) and (iv)
promote oral hygiene and breath freshness (under the "DentaHealth" brand name).
The Company also markets a chewing gum product which includes antioxidant
vitamins (under the "Vita A-C-E" brand name). Sales of Power Gum and Love Gum
commenced in 1994 while sales of Buzz Gum, ChromaTrim and CitrusSlim commenced
in 1991, 1993 and 1995, respectively. The Company began distribution of Repose,
DentaHealth and Vita A-C-E in April 1996 and is currently developing zinc,
anti-smoking and calcium supplement gums.
The Company contracted with others for the manufacture of all its chewing
gum products until February 1996 when it completed leasehold improvements and
began initial manufacture of chewing gum products in its 28,000 square foot
facility in Phoenix, Arizona. The facility employs 33 workers and produces all
of the Company's chewing gum products. See "Item 1 Manufacturing and Packaging."
The Company's business strategy is to (i) manufacture its own chewing gum
products and the private label chewing gum products of other chewing gum
marketers in greater quantities and at lower costs, (ii) increase revenues by
(a) expanding its marketing efforts for existing chewing gum products, (b)
developing new chewing gum products through its own research and development
facilities, (c) further developing its private label business, and (d) form
marketing alliances and joint ventures with multinational companies which market
consumer packaged goods, and (iii) expand its distribution and customer base by
adding over-the-counter ("OTC") non-prescription medications (such as antacids,
cough suppressants, pain relievers and the like) to its chewing gum products.
The Company has not yet commenced the distribution or marketing of any OTC
chewing gum products but expects (but cannot assure) that it will do so by
October 1997. See "Item 1 - Strategy."
The Company markets its chewing gum products through wholesale distributors
who distribute primarily to natural food stores and directly as well as through
food brokers, independent representatives and distributors to drug store and
convenience store chains (including Walgreen's, Drug Emporium, Long's, Thrifty,
Sav-On, Phar-Mor, Eckard and Payless), mass market and club store chains
(including Target and K-Mart) and major supermarket chains (including Safeway,
Smith's and Lucky's). In addition, the Company sells in a number of
international markets including Europe, the Far East and the former Soviet
Union. The Company also manufactures product for sale to larger private label
customers who market under their own brand names.
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Some of the Company's specialty chewing gum products are subject to
regulation by the United States Food and Drug Administration ("FDA"). If the FDA
concludes that certain chewing gum products are "drugs" under applicable FDA
regulations or if the Company commences marketing of OTC chewing gum products,
the FDA may restrict or remove any or all of the Company's chewing gum products
from the market if such products violate FDA rules or regulations.
The Company was incorporated in Utah in February 1991 as a specialty
chewing gum products marketer under the name Nekros International Marketing,
Inc. with office and warehouse facilities initially located in Ogden, Utah. In
November 1994, control of the Company changed and between May 1995 and November
1995, the Company raised an aggregate of $1,006,000 of equity capital and
$2,400,000 of debt capital. The funds raised in 1995 were used to establish a
new management team, develop additional chewing gum products, build inventories
and purchase chewing gum manufacturing equipment for its 28,000 square foot
leased manufacturing facility in Phoenix, Arizona.
In October 1995, the Company borrowed $1,550,000 from a group of four
lenders (the "1995 Bridge Loan"). As additional compensation for the 1995 Bridge
Loan, the Company issued an aggregate of 465,000 common stock purchase warrants
to the lenders, each such warrant exercisable to purchase one share of the
Company's Common Stock at $2.00 per share exercisable in perpetuity. The Bridge
Loan bore interest at 8% per annum and was repaid in April 1996 using proceeds
from the Prior Offering. The Bridge Loan lenders included Brett Bouchy, a former
principal stockholder of the Company (who received 165,000 warrants), and Robert
H. Wood, a former director of the Company (who received 75,000 warrants). In
March 1996, Brett Bouchy sold 100,000 warrants to Gary S. Kehoe and 65,000
warrants to Robert H. Wood, both officers and directors of the Company, for
$5.00 per warrant. The purchase price was paid by the issuance of promissory
notes by Messrs. Kehoe and Wood to Mr. Bouchy bearing interest at 9% per annum.
The warrants are not collateral for the promissory notes. The promissory notes
are due the earlier of (i) six months after the warrants are exercised or (ii)
if during the period from April 24, 1997 until April 24, 2000 the closing price
of the Company's Common Stock on NASDAQ is $10.00 or more per share for five
consecutive trading days then the promissory notes are due six months from the
last such trading day. If neither event occurs, the promissory notes become void
and of no value on April 24, 1999 and the warrants remain the property of
Messrs. Kehoe and Wood. Under no circumstances will the warrants become
returnable to Mr. Bouchy.
In December 1995, Dale dissolved and issued 51% and 49% respectively of its
Common Stock in the Company and its loans receivable due from the Company to
Riverlux Trust REG and Brett Bouchy. Riverlux Trust REG and Brett Bouchy
received 665,265 shares and 639,175 shares, respectively, of Dale's
stockholdings in the Company and $433,500 and $416,500, respectively, of Dale's
loans receivable from the Company. The loans were repaid out of proceeds of the
Prior Offering. Subsequently, Riverlux Trust REG and Mr. Bouchy each sold 20,000
shares of the Company's Common Stock to Mr. Kehoe for $2.00 per share.
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In January 1996, the Company raised $3,095,875 through a private equity
placement to repurchase and retire 619,175 shares of the Company's Common Stock
held by a former principal stockholder. In April 1996, the Company sold to the
public 460,000 Units of its securities at $18.00 per Unit, each Unit consisting
of three shares of Common Stock and one Common Stock Purchase Warrant (the
"Public Warrant") to purchase an additional share of Common Stock at any time
until April 24, 2001 at $7.50 per share (the "Prior Offering"). At the same
time, the Company registered 619,175 shares which were sold in the
aforementioned private placement. The Prior Offering was underwritten by
Kensington Securities, Inc. (the "Prior Representative").
In March 1997, the Company completed the sale of an aggregate of $2,530,000
of convertible debentures ("Debentures"). The Debentures bear interest at 11%
per annum, are due and payable on January 1, 2002 and are convertible into the
Company's Common Stock at $4.75 per share. The Common Stock issuable under the
Debentures carries certain registration rights after July 31, 1997. However, any
Common Stock issuable upon conversion of the Debentures is subject to a lock-up
agreement with the Company through January 31, 1998. Proceeds from the sale of
the Debentures will be used for working capital and other corporate purposes.
Strategy
The Company pursues the following business strategy:
(i) Manufacture its own chewing gum products. The Company will continue to
manufacture its chewing gum products under its own labels and on a private label
basis for other chewing gum marketers. The Company believes that operating its
own manufacturing facility significantly reduces its dependence on third party
manufacturers, assists it in maintaining the secrecy of its proprietary chewing
gum formulas, reduces its product costs and increases product capacity for
itself and its large volume customers.
(ii) Increase revenues by expanding its marketing efforts for existing
chewing gum products, developing new chewing gum products, further developing
its private label business and forming marketing alliances. The Company will
continue to expand marketing efforts for existing products (both in the United
States and internationally) and to further develop its private label business in
order to manufacture more chewing gum products for other chewing gum marketers.
The Company will continue to develop new specialty chewing gum products for
itself and its private label customers, such as the three specialty products it
introduced in 1996 (Vita A-C-E, Repose and DentaHealth), and its zinc,
anti-smoking and calcium supplement gums, which are under development. Because
the Company is significantly smaller than most of its competitors, it intends to
develop, manufacture and market specialty chewing gum products in niche markets
that are considered too small for exploitation by many of these competitors.
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Development of these products will be undertaken at the Company's research and
development laboratory facility located within the Company's manufacturing
facility in Phoenix, Arizona, which consists of 900 square feet of laboratory
space staffed by two employees and assisted by members of management and outside
consultants. The Company also seeks to form marketing alliances and joint
venture arrangements with multinational companies which market consumer packaged
goods to promote and distribute the Company's existing and future gum products.
(iii) Expand its distribution and customer base by adding OTC medications
(such as antacids, cough suppressants, pain relievers and the like) to its
chewing gum products. The Company has certain OTC chewing gum products in
development and expects to explore market potential for a number of such
products in the near future. The Company believes that OTC chewing gum products
may appeal to certain retailers (such as drug stores and health food stores) and
offer the Company the potential to develop new consumer niche markets. Any such
OTC chewing gum products will require FDA permission to market and will be
subject to ongoing FDA marketing and manufacturing regulations. See "Item 1 -
FDA and Other Government Regulation."
Marketing
The Company markets its chewing gum products through wholesale distributors
who distribute primarily to natural food stores and directly as well as through
food brokers, independent representatives and distributors to large drug store
and convenience store chains (including Walgreen's, Drug Emporium, Long's,
Thrifty, Sav-On, Phar-Mor, Eckard and Payless), mass market and club store
chains (including Target and K-Mart) and major supermarket chains (including
Safeway, Smith's and Lucky's). In addition, the Company sells in a number of
international markets including Europe, the Far East and the former Soviet
Union.
The Company also manufactures and private labels certain specialty chewing
gum products to retail health food chains, wholesalers and other marketers,
including Schiff/Weider Nutrition, General Nutrition Centers (GNC), Hammer
Corp., Body Ammo and GEN. Under private label arrangements, the Company supplies
chewing gum products (including formulas used by the Company and its customers)
labeled with brand names selected by its private label customers or otherwise
includes the private label customer's name on the gum product packaging.
In January 1996, the Company entered into a five-year agreement (the
"Mayday Agreement") with Mayday, Inc. ("Mayday") pursuant to which it retained
Mayday to oversee and administer the Company's sales agents, brokers and
distributors in certain markets. The Mayday Agreement was cancelled in January
1997.
The Company intends to continue to expand its marketing efforts by (i)
hiring additional sales personnel to obtain and manage new brokers and
distributors, (ii) developing media advertising materials for use by the Company
and its brokers and distributors, (iii) retaining personnel to further develop
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the Company's private label business and seek other forms of contract
manufacturing business and (iv) forming marketing alliances and joint ventures
with multinational companies which market consumer packaged goods.
Manufacturing and Packaging
In March 1996, the Company began manufacturing, packaging and shipping its
chewing gum products from a 28,000 square foot leased manufacturing facility in
Phoenix, Arizona. The manufacture of chewing gum products involves (i) the
storage of bulk raw materials and "fine" raw materials (such as flavor, colors
and active ingredients), (ii) production and mixing of the gum base in large
stainless steel mixers, (iii) the extruding of the gum into selected sizes and
shapes, (iv) coating the gum (in the case of chiclet gums) with sugar or
sugarless solutions and (v) packaging the gum in bottles or blister packages for
shipment.
Prior to commencing production of the chewing gum, lot numbers are recorded
for all ingredients, certificates of ingredients are examined and filed, quality
control tests are performed and equipment and utensils are sanitized. Additional
quality control tests are conducted throughout the manufacturing process.
The Company leases approximately $2 million of chewing gum manufacturing
equipment on a six-year lease at a monthly rental of $32,300 from Textron
Financial Corporation. The Company has the option to purchase the equipment at
the conclusion of the lease for the greater of the then fair market value of the
equipment (which may not exceed 30% of the cost of the equipment) or 20% of the
original cost of the equipment.
The Company's manufacturing facility produces most of the Company's chewing
gum products and provides the capacity to meet most of the Company's private
label product requirements for the foreseeable future.
Competition
The distribution and sale of chewing gum products are highly competitive
and includes three multi-billion dollar United States-based multinational
companies (Wm. Wrigley Jr. Company, Warner Lambert Company and Nabisco Food
Group, Inc.) which own most of the chewing gum brands, large specialty chewing
gum manufacturers, such as The Topps Company ("Bazooka" brand chewing gum) and
Marvel Holdings, Inc. ("Double Bubble" brand chewing gum), and small specialty
chewing gum product marketers, such as the Company.
Competitive factors in the chewing gum industry include price, flavor and
name recognition resulting from media advertising. The Company does not have the
capital resources, marketing and distribution networks, manufacturing
facilities, personnel, product name recognition or advertising budget to
introduce chewing gum brands intended to compete with the multinational chewing
gum manufacturers or the large specialty chewing gum marketers. However, the
Company believes (but cannot assure) that it can develop and market specialty
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chewing gum products in niche markets (such as the weight loss, vitamin,
premenstrual symptom, dental hygiene, anti-smoking, zinc and calcium markets)
that are considered too small for exploitation by many of the Company's
competitors.
FDA and Other Government Regulation
The Company is subject to various federal, state and local laws affecting
its business. The Company's chewing gum products manufactured by it or by others
for it under contract or otherwise are subject to regulation by the FDA
including regulations with respect to labeling of products, approval of
ingredients in products, claims made regarding the products and disclosure of
product ingredients. Moreover, if the FDA concludes that any of the Company's
chewing gum products are "drugs" under applicable FDA regulations or otherwise
violate FDA rules or regulations, the FDA may (i) require that manufacture of
such products be in accordance with FDA "good manufacturing practices" (which
prescribe specific requirements and procedures for the manufacture of FDA
regulated products), or (ii) restrict or remove such products from the market.
The Company (i) believes all of its products are in compliance with all
regulatory requirements, (ii) has not been advised that the FDA considers any of
its products to be "drugs", and (iii) has not submitted any information or
applications for approval to the FDA. If the Company commences marketing OTC
chewing gum products, such products will be subject to marketing permission and
ongoing regulation by the FDA including (i) requirements that the Company comply
with certain FDA manufacturing standards and practices, (ii) conformity with FDA
labeling requirements including dosage information and (iii) the ability to
determine the origin of all chewing gum ingredients included in the
manufacturing process.
Advertising claims made by the Company with respect to its products are
subject to the jurisdiction of the FTC as well as the FDA. In both cases the
Company is required to obtain scientific data to support any advertising or
labeling health claims it makes concerning its products, although no
preclearance or filing is required to be made with either agency.
The Company's chewing gum manufacturing facility is subject to regulation
by various governmental agencies, including state and local licensing, zoning,
land use, construction and environmental regulations and various health,
sanitation, safety and fire codes and standards. Suspension of certain licenses
or approvals, due to failure to comply with applicable regulations or otherwise,
could interrupt the Company's manufacturing operations. If the Company commences
marketing OTC chewing gum products, its manufacturing facility will also be
subject to inspection and regulation by the FDA.
The Company is subject to federal and state laws establishing minimum wages
and regulating overtime and working conditions. Since many of the Company's
personnel are paid at rates based on the federal minimum wage, an increase in
such minimum wage will result in an increase in the Company's labor costs.
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Barter Agreement
In December 1996, the Company entered into a barter agreement (the "Barter
Agreement") with Active Media Services, Inc. ("Active") pursuant to which Active
accepted $3,500,000 of the Company's gum products in exchange for advertising,
printing and travel credits. The Company must pay for approximately 75% of the
advertising, printing and travel expenses in cash and may pay the remaining 25%
using its bartered credits. Any unused credits on February 28, 2000 expire and
will be valueless. The Company shipped approximately $750,000 of product in the
fourth quarter of calendar year 1996 as a result of the Barter Agreement. The
Company has recorded the transaction with no amounts recorded for sales. The
sale is recorded at the carrying value of the inventory, which was reduced to
zero, prior to the sale (as more fully described in Note 2 to the financial
statements "Restatement of Financial Information.")
Trademarks, Trade Names and Proprietary Rights
The Company routinely seeks trademark protection from the United States
Patent Office ("USPO") and from similar agencies in foreign countries for
chewing gum brands. There can be no assurance that the Company will be able to
successfully defend any trademarks or trade names granted to it against claims
from or use by competitors or that trademark or trade name applications will be
approved by the USPO or any similar foreign agency.
The Company considers some of its chewing gum formulations and processes to
be proprietary in nature and relies upon a combination of non-disclosure
agreements, other contractual restrictions and trade secrecy laws to protect
such proprietary information. There can be no assurance that these steps will be
adequate to prevent misappropriation of the Company's proprietary information or
that the Company's competitors will not independently develop chewing gum
formulations and processes that are substantially equivalent or superior to the
Company's.
Employees
As of February 28, 1997, the Company employed 49 individuals including its
nine executive officers, 30 manufacturing and warehouse personnel and ten
administrative personnel.
Litigation
In October 1996, an action was filed against the Company in the United
States District Court for the Central District of California, CV-95-9784,
entitled "GCN Products, Inc. vs. Roy Kelly, et al." In its complaint, as it
relates to the Company, the Plaintiff alleges that the Company engaged in
unlawful rebates, appropriations, overcharges, commercial bribery, fraud and
unjust enrichment. The Plaintiff seeks compensatory and punitive damages. The
Company denies the Plaintiff's allegations and intends to vigorously defend the
Action.
No other material litigation is pending or threatened against the Company.
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ITEM 2. DESCRIPTION OF PROPERTY
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The Company leases 3,345 square feet for its executive offices at 4205
North 7th Avenue, Phoenix, Arizona 85013 on a three-year lease expiring December
31, 1998 for an average rental of approximately $3,000 per month. The Company
also leases an approximately 28,000 square foot building for its chewing gum
manufacturing facilities at 246 East Watkins, Phoenix, Arizona 85004 on a
ten-year lease (with two three-year renewal options) expiring December 2005 at a
monthly rental of approximately $12,000.
The Company believes its facilities are adequate for its needs in the
foreseeable future and that additional space is available at reasonable rates.
ITEM 3. LEGAL PROCEEDINGS
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Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Not applicable.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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The Company's Common Stock has traded on the National Market under the
symbol "GUMM" since April 24, 1996.
The following table sets forth for the quarters indicated the range of
high and low closing prices of the Company's Common Stock as reported by the
National Market but does not include retail markup, markdown or commissions.
Price
----------------
By Quarter Ended: High Low
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March 31, 1997 (through February 28, 1997)................ $8.75 $5.50
December 31, 1996......................................... 7.75 5.75
September 30, 1996........................................ 6.125 6.00
June 30, 1996............................................. 6.875 6.375
As of February 28, 1997, the Company had approximately 380 record and
beneficial stockholders.
Dividend Policy
The Company has paid only limited cash dividends on its Common Stock in the
past and intends to retain earnings, if any, for use in the operation and
expansion of its business. The amount of future dividends, if any, will be
determined by the Board of Directors based upon the Company's earnings,
financial condition, capital requirements and other conditions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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Overview
The Company was organized in 1991 to develop, market and distribute
specialty chewing gum products. The Company's first chewing gum product included
a natural caffeine substance marketed to runners and other exercise enthusiasts
as a source of energy and carbohydrates. In 1994 and 1995, the Company raised
funds through debt and equity financings which were used to establish a new
management team, develop additional chewing gum products, build inventories and
purchase chewing gum manufacturing equipment for the Company's 28,000 square
foot manufacturing facility which commenced operations in late March 1996. The
facility has 33 employees and by the end of 1996 the Company produced 100% of
its chewing gum products in the facility.
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Information contained in this Report contains "forward-looking statements"
which can be identified by the use of forward-looking terminology such as
"believes," "expects," "may," "should" or "anticipates" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy. No assurance can be given that the future results covered by the
forward-looking statements will be achieved. The following matters constitute
cautionary statements identifying important factors with respect to such
forward-looking statements, including certain risks and uncertainties, that
could cause actual results to vary materially from the future results covered in
such forward-looking statements. Other factors could also cause actual results
to vary materially from the future results covered in such forward-looking
statements.
Results of Operations
The following table sets forth certain statement of operations information
expressed both in dollars and as a percentage of net sales for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
1996* 1995 1994
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<S> <C> <C> <C> <C> <C> <C>
Net sales $3,116,130 100.0% $4,343,590 100.0% $1,941,562 100.0%
Cost of sales 2,070,443 66.4 2,310,643 53.2 1,011,956 52.1
Gross profit 1,045,687 33.6 2,032,947 46.8 929,606 47.9
Operating expenses 4,199,288 134.8 1,118,510 25.7 694,555 35.8
Research and development 364,728 11.7 90,348 2.1 - -
Income (loss) from
operations (3,518,329) (112.9) 824,089 19.0 235,051 12.1
Interest and other income 117,219 3.8 53,212 1.2 940 .1
Interest expense 219,668 7.0 108,980 2.5 4,402 .2
Pro forma provision (benefit)
for income taxes (232,371) (7.4) 270,850 6.2 81,000 4.2
Pro forma net income (loss) (3,388,407 (108.7) 497,471 11.5 150,589 7.8
</TABLE>
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Net Sales. Net sales decreased by $1,227,460, or 28.3%, to $3,116,130 for
the year ended December 31, 1996 compared to $4,343,590 for the year ended
December 31, 1995. The decrease in sales was primarily attributable to a
substantial reduction in product sales to two significant customers, National
Distributing Group ("NDG") and Universal Merchants, Inc. ("UMI"). For the year
ended December 31, 1996, NDG and UMI accounted for 17.5% and 3.5% of the
Company's sales, respectively, compared to 42.8% and 26.7% of the Company's
sales, respectively, for the year ended December 31, 1995. The ChromaTrim sales
agreements with NDG and UMI were mutually terminated in February, 1996. See
"Item 1 - Barter Agreement."
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Cost of Sales. Cost of sales, as a percentage of sales, increased
approximately 13% to $2,070,443 or 66% of net sales for the year ended December
31, 1996, compared to $2,310,643 or 53% of net sales for the same period in
1995. The primary reason for the increase was the Company's manufacturing plant
has been operating at a minimal capacity which has resulted in a higher cost per
pound of gum. In addition, the Company's sales under its Barter Agreement have
been recorded at a zero value with a cost of sale of $134,422. See "Item 1 -
Barter Agreement."
Gross Profit. Gross profit, as a percentage of sales, decreased by
approximatey 13% to $1,045,687 or 34% of net sales for the year ended December
31, 1996, compared to $2,032,947 or 47% of net sales for the same period in
1995.
Operating Expenses. Operating expenses were $4,199,288, an increase of
$3,080,778 for the year ended December 31, 1996, compared to the same period in
1995. Approximately $1,239,467 of these operating expenses were directly
attributable to the operations of the manufacturing plant, including $420,662
relating to depreciation expense. No manufacturing expenses were incurred for
the year ended December 31, 1995 as the Company had not yet commenced
manufacturing operations. Moreover, because the manufacturing facility continues
to operate at only a small percentage of its capacity, revenues were not
sufficient to offset the manufacturing operating expenses. Factors contributing
to an increase in non-manufacturing operating expenses were related to
advertising ($941,469), indirect labor ($714,093), direct labor ($454,647),
professional fees for legal, accounting, art/production, and general consulting
($468,862), insurance ($230,625), and infomercial expenses ($364,286).
Research and Development. Research and development expenditures were
$364,728 for the year ended December 31, 1996, compared to $90,348 for the same
period in 1995. The majority of these costs were related to the write-offs of
various gums used in the debugging and testing of the new manufacturing
equipment, the development and production scale-up of the Jack Lalanne product
line, DentaHealth, Vita A-C-E and Repose, the development of three "over the
counter" products and various private label products.
Interest and Other Income and Interest Expense. Interest and other income
were $117,219, an increase of $64,007 primarily as a result of an increase in
working capital from equity financings that were invested in short-term
investments. Interest expense was $219,668, an increase of $110,688 for the year
ended December 31, 1996 compared to the same period in 1995. This increase was a
result of the Company entering into a $1.85 million equipment financing
agreement with Textron Financial Corporation for the Company's gum manufacturing
equipment in December 1995. In addition, the Company issued $2.4 million of debt
securities in 1995. Proceeds from the loans were used to pay deposits on chewing
gum manufacturing equipment, to build inventories of new products, for marketing
expenses and working capital. Proceeds from the Prior Offering were used to
retire debt in May 1996.
Net Income. The Company lost $3,388,407 for the year ended December 31,
1996 compared to a profit of $497,471 for the same period in 1995. The loss
incurred for 1996 was primarily due to an increase in operating expenses
incurred in establishing the Company's manufacturing facility.
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Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Net Sales. Net sales increased by $2.4 million, or 124%, to $4.3 million
for the year ended December 31, 1995 ("1995") compared to $1.9 million for the
year ended December 31, 1994 ("1994"). The increase in sales was primarily the
result of "CitrusSlim" which accounted for $340,000 of such sales increase and
the expansion of the Company's distribution channels to include infomercial
television broadcast which the Company believes were also responsible for a
large part of the additional sales. In addition, National Distributing Group and
Universal Merchants, Inc. accounted for 42.8% and 26.7% of the Company's sales,
respectively for the year ended December 31, 1995, compared to 62.4% and 0% of
the Company's sales, respectively, for the year ended December 31, 1994.
Cost of Sales. Cost of sales increased 1% to 53% in 1995 compared to 52% in
1994 primarily as a result of new package designs, increased production costs
and the purchase of higher priced gum from a foreign supplier to be used in a
chewing gum product sold internationally. The majority of the Company's costs of
sales resulted from purchases of gum products from third party manufacturers.
Costs of sales are expected to be reduced when the Company's manufacturing
facility is completed.
Gross Profit. Gross profit decreased 1% to 47% in 1995 compared to 48% in
1994 as a result of the increased costs discussed above and certain price
discounts given by the Company to volume distributors. During 1995, the Company
pursued relationships with distributors that specialized in selling to mass
merchandisers, drug and convenience stores and national broadcasters of
infomercials. While these distributors were offered volume price discounts, the
arrangement increased sales revenue, decreased monthly sales fluctuations and
allowed for more orderly production planning
Operating Expenses. Operating expenses increased $423,955 in 1995 compared
to 1994 but decreased as a percentage of net sales from 36% in 1994 to 26% in
1995. The increase in expenditures was primarily due to the hiring of new
management personnel ($152,508) together with increases in trade show expenses
($48,939), legal fees ($80,317) and travel expenses ($60,634). The reduction of
operating expenses as a percentage of net sales was the result of increased
sales. Operating expenses will increase as the Company expands its manufacturing
operations.
Research and Development. Research and development expenditures were
$90,348 in 1995 compared to $0 in 1994 and resulted from expenses associated
with development of new products. Prior to June 1995, development activities
were conducted by outside consultants. The Company developed three additional
products which it intended to introduce in 1995. However, the Company was unable
to obtain assurances that its existing manufacturer would be able to supply
adequate quantities of the product. Consequently, management decided that the
new products will be introduced in 1996 when the Company's manufacturing
facility is completed.
Interest and Other Income and Interest Expense. Interest expense increased
$108,980 in 1995 (from $4,402 in 1994) as a result of the Company issuing $2.4
million of debt securities, which will be retired using proceeds of the
Offering. Proceeds from the loans were used to pay deposits on chewing gum
14
<PAGE>
manufacturing equipment, to build inventories of new products, for marketing
expenses and working capital. Interest and other income increased $52,272
primarily as a result of an increase in working capital from equity financings
that was invested in short-term investments.
Pro Forma Provisions for Income Taxes. Beginning January 1, 1993, the
Company was an S Corporation under the provisions of the Internal Revenue Code
through November 18, 1994. As such, the Company was not subject to federal and
state income taxes and, accordingly, no provision was made for income taxes for
1993 and 1994, and the Company's stockholders were required to report the
Company's taxable income on their tax returns. The statements of operations
include a pro forma income tax adjustment that represent the federal and state
provision for income taxes as if the Company had been a taxable entity paying
federal and state income taxes for all periods presented at the rates applicable
in each period. Effective November 18, 1994, the Company revoked its S
Corporation election and all income subsequent to that date will be subject to
federal and state income taxes.
Pro forma Net Income. Net income after pro forma income taxes increased
from $150,589 in 1994 to $497,471 in 1995 primarily as a result of increased net
sales and the resulting economies of scale applicable to the Company's fixed and
variable expenses.
Liquidity and Capital Resources
As of December 31, 1996, the Company's working capital was $2.90 million
compared to $1.92 million as of December 31, 1995. For the year ended December
31, 1996, the Company experienced a decrease in cash provided by operating
activities of $3,702,827 primarily as a result of an increase in operating
expenses, prepaid expenses and inventories. The increase in inventory was
directly related to the build-up of new product, finished goods and raw
materials for the manufacturing plant.
Investing activities consumed $1,037,009 in cash for the year ended
December 31, 1996 compared to $1,531,945 of cash consumed in the same period of
1995. This was primarily from equipment purchased to start up the manufacturing
plant and loans provided to three Company officers.
Financing activities provided $5,353,260 in cash for the year ended
December 31, 1996, compared to $2,770,676 in cash for the same period in 1995.
This increase in cash was primarily a result of the Company successfully
completing its Prior Offering of 400,000 units (each unit consisted of three
shares of no par value common stock and one redeemable common stock purchase
warrant) for gross proceeds of $7.2 million on April 24, 1996. In addition, the
Underwriter exercised its Overallotment Option of 60,000 units and the Company
received gross proceeds of $1.08 million on May 24, 1996. The Company paid $1.45
million in commissions, underwriter's expenses and other costs related to the
Prior Offering. The Company used $2.57 million from the Prior Offering to repay
certain debt.
15
<PAGE>
Textron Financial Corporation provided lease financing of approximately
$1.85 million for the Company's gum manufacturing equipment under a six-year
equipment lease agreement executed in December 1995.
The Company's future results of operations and the other forward-looking
statements contained in this document, in particular the statements concerning
plant efficiencies and capacities, capital spending, research and development,
competition, marketing and manufacturing operations and other information
provided herein involve a number of risks and uncertainties. In addition to the
factors discussed above, among the other factors that could cause actual results
to differ materially are general business conditions and the general economy;
rival gum manufacturers' pricing and marketing efforts; availability of
third-party material products at reasonable prices; risk of nonpayment of
accounts receivable; risks of inventory obsolescence due to shifts in market
demand; timing of product introductions; and litigation involving product
liabilities and consumer issues.
16
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
- ------- --------------------
17
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Financial Statements Page
- -------------------- ----
Independent Auditors' Report F-2
Balance Sheet as of December 31, 1996 F-3
Statements of Operations for the years ended
December 31, 1996 and 1995 F-5
Statements of Changes in Stockholders' Equity for the
years ended December 31, 1996 and 1995 F-6
Statements of Cash Flows for the years ended
December 31, 1996 and 1995 F-7
Notes To Financial Statements F-8
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Gum Tech International, Inc.
We have audited the accompanying balance sheet of Gum Tech International, Inc.
as of December 31, 1996 and the related statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above after the restatement
described in Note 2 present fairly, in all material respects, the financial
position of Gum Tech International, Inc. as of December 31, 1996 and the results
of its operations and its cash flows for the years ended December 31, 1996 and
1995 in conformity with generally accepted accounting principles.
/S/ ANGELL & DEERING
---------------------------------------
Angell & Deering
Certified Public Accountants
Denver, Colorado
January 24, 1997, except for
Note 13 as to which the date
is March 6, 1997 and Note 2 as
to which the date is March 16, 1998
F-2
<PAGE>
GUM TECH INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, 1996
ASSETS
------
*
Current Assets:
Cash and cash equivalents $1,116,751
Restricted cash 54,629
Accounts receivable, net of
allowance for doubtful
accounts of $35,000 753,872
Inventories 1,366,944
Income tax receivable 234,440
Prepaid expenses 63,519
----------
Total Current Assets 3,590,155
----------
Property and Equipment, at cost:
Machinery and equipment 3,290,692
Office furniture and equipment 116,667
Leasehold improvements 190,526
----------
3,597,885
Less accumulated depreciation (459,403)
----------
Net Property and Equipment 3,138,482
----------
Other Assets:
Deposits 277,582
Notes receivable 316,000
Other 135,893
----------
Total Other Assets 729,475
----------
Total Assets $7,458,112
==========
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
The accompanying notes are an integral
part of these financial statements.
F-3
<PAGE>
GUM TECH INTERNATIONAL, INC.
BALANCE SHEET
DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
*
Current Liabilities:
Accounts payable $ 386,162
Accrued expenses 12,103
Customer deposits 65,500
Current portion of long-term debt 223,567
-----------
Total Current Liabilities 687,332
-----------
Long-Term Debt, net of current portion above:
Obligations under capital leases 1,488,054
-----------
Commitments and Contingencies --
Stockholders' Equity:
Preferred stock: no par value,
1,000,000 shares authorized,
none issued or outstanding --
Common stock: no par value,
10,000,000 shares authorized,
4,948,740 shares issued and
outstanding 7,965,060
Retained earnings (deficit) (2,682,334)
-----------
Total Stockholders' Equity 5,282,726
-----------
Total Liabilities and
Stockholders' Equity $ 7,458,112
===========
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
The accompanying notes are an integral
part of these financial statements.
F-4
<PAGE>
GUM TECH INTERNATIONAL, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996* 1995
---- ----
Net sales $ 3,116,130 $4,343,590
Cost of sales 2,070,443 2,310,643
----------- ----------
Gross Profit 1,045,687 2,032,947
Operating expenses 4,199,288 1,118,510
Research and development 364,728 90,348
----------- ----------
Income (Loss) From
Operations (3,518,329) 824,089
----------- ----------
Other Income (Expense):
Interest and other income 117,219 53,212
Interest expense (219,668) (108,980)
----------- ----------
Total Other Income (Expense) (102,449) (55,768)
----------- ----------
Income (Loss) Before Provision
For Income Taxes (3,620,778) 768,321
Provision (benefit) for income
taxes (232,371) 270,850
----------- ----------
Net Income (Loss) $(3,388,407) $ 497,471
=========== ==========
Net Income (Loss) Per Share of
Common Stock $ (.77) $ .11
=========== ==========
Weighted Average Number of
Common Shares Outstanding 4,423,402 4,392,658
=========== ==========
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
The accompanying notes are an integral
part of these financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
GUM TECH INTERNATIONAL, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
Common Stock Retained
------------------------------ Earnings
Shares Amount (Deficit)*
------ ------ ---------
<S> <C> <C> <C>
Balance at December 31, 1994 3,016,740 $ 279,000 $ 246,051
Cash dividends -- -- (37,449)
Issuance of common stock in
private offering (net of
offering costs of $117,883) 420,000 638,117 --
Net income -- -- 497,471
--------- ---------- -----------
Balance at December 31, 1995 3,436,740 917,117 706,073
Issuance of common stock upon
exercise of stock options 132,000 234,000 --
Issuance of common stock and
warrants in public offering
(net of offering costs of
$1,466,057) 1,380,000 6,813,943 --
Net loss -- -- (3,388,407)
--------- ---------- -----------
Balance at December 31, 1996 4,948,740 $7,965,060 $(2,682,334)
========= ========== ===========
</TABLE>
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
The accompanying notes are an integral
part of these financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
GUM TECH INTERNATIONAL, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
1996* 1995
---- ----
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(3,388,407) $ 497,471
Adjustments to reconcile net income (loss) to cash (used)
by operating activities:
Depreciation 454,654 13,077
Provision for bad debts 20,111 11,000
Loss on disposal of assets 11,036 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable 161,348 (661,302)
(Increase) in inventories (468,279) (663,928)
(Increase) in income tax receivable (234,440) --
(Increase) in prepaid expenses and other (73,660) (43,940)
(Increase) in deposits and other (80,401) (52,207)
Increase (decrease) in accounts payable and
accrued expenses (133,330) 102,235
Increase in customer deposits 28,541 36,959
----------- -----------
Net Cash (Used) By Operating Activities (3,702,827) (760,635)
----------- -----------
Cash Flows From Investing Activities:
Capital expenditures (572,602) (864,322)
Increase in notes receivable (216,000) (100,000)
Receipt of principal on notes receivable -- 100,000
Deposits on purchase of equipment and other (248,407) (667,623)
----------- -----------
Net Cash (Used) By Investing Activities (1,037,009) (1,531,945)
----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowing 706,397 2,400,000
Principal payments on notes payable (2,589,330) (41,742)
Issuance of common stock 8,514,000 756,000
Cash dividends -- (37,449)
Offering costs incurred (1,277,807) (306,133)
----------- -----------
Net Cash Provided By Financing Activities 5,353,260 2,770,676
----------- -----------
Net Increase in Cash and Cash Equivalents 613,424 478,096
Cash and Cash Equivalents at Beginning of Year 503,327 25,231
----------- -----------
Cash and Cash Equivalents at End of Year $ 1,116,751 $ 503,327
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest $ 327,031 $ 3,191
Income taxes 24,409 246,442
Supplemental Disclosure of Non-cash Investing and
Financing Activities:
Capital lease obligations incurred for new
equipment $ 1,194,544 $ --
</TABLE>
* Amounts have been restated for certain items as more fully described in
Note 2 - Restatement of Financial Information.
The accompanying notes are an integral
part of these financial statements.
F-7
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
-----------------------------------------------------------
Organization
------------
Gum Tech International, Inc. (the "Company") was incorporated in Utah on
February 4, 1991 to develop, market and distribute specialty chewing gum
products under its own brand names and on a private label basis for other
chewing gum marketers. The Company currently markets chewing gum products
with certain ingredients added to promote weight control, energy endurance,
oral hygiene and breath freshness. The Company also markets chewing gum
products which include anti-oxidant vitamins, zinc, calcium and anti-
smoking preparations.
Amendment to Authorized Common and Preferred Shares and Stock Split
------------------------------------------------------------------------
In March 1995, the Company's stockholders adopted a resolution approving a
five for one stock split of the issued and outstanding common shares. The
Company's Board of Directors also authorized, and the shareholders
approved, an amendment and restatement of the Company's Articles of
Incorporation, to increase the number of authorized shares of common stock
from 1,000,000 to 10,000,000 shares and to authorize the issuance of up to
1,000,000 shares of preferred stock.
In December 1995, the Company approved a two for one stock split of the
issued and outstanding common shares. All share information and per share
data have been retroactively restated for all periods presented to reflect
the stock splits and increase in authorized shares.
Inventories
-----------
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out pricing method.
Property and Equipment
----------------------
Depreciation of the primary asset classifications is calculated based on
the following estimated useful lives using the straight-line method.
Classification Useful Life in Years
-------------- --------------------
Machinery and equipment 5-10
Office furniture and equipment 5
Leasehold improvements 10
Depreciation of property and equipment charged to operations is $454,654
and $13,077 for the years ended December 31, 1996 and 1995, respectively.
Revenue Recognition
-------------------
The Company recognizes revenue from product sales upon shipment to the
customer.
Stock-Based Compensation
------------------------
During the year ended December 31, 1996, the Company adopted Statement of
Financial Accounting Standard (SFAS) No. 123,
F-8
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------------------------
Stock-Based Compensation (Continued)
------------------------------------
"Accounting for Stock-Based Compensation". The Company will continue to
measure compensation expense for its stock-based employee compensation
plans using the intrinsic value method prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees". See Note 8 for pro forma
disclosures of net income and earnings per share as if the fair value-
based method prescribed by SFAS 123 had been applied in measuring
compensation expense.
Income Taxes
------------
Beginning January 1, 1993, the Company was an S corporation under the
provisions of the Internal Revenue Code and, accordingly, no provision was
made for income taxes since all income, deductions, gains, losses and
credits were reported on the tax returns of the stockholders. The S
corporation status of the Company terminated on November 18, 1994 and,
thereafter, the Company became a taxable entity. Effective November 18,
1994, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes."
SFAS No. 109 requires the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences in the recognition
of revenue and expenses for income tax and financial reporting purposes.
These differences are primarily due to depreciation.
Deferred Offering Costs
-----------------------
In connection with the Company's public offering (Note 7), costs incurred
to complete the offering have been deferred and were offset against the
proceeds of the offering.
Net(Loss) Income Per Share of Common Stock
------------------------------------------
Net income (loss) per share of common stock is based upon the weighted
average number of outstanding shares of common stock and, pursuant to the
Securities and Exchange Commission Staff Accounting Bulletins, common
shares, options and warrants issued by the Company at prices below the
assumed initial public offering price during the twelve months immediately
preceding the offering date are included in the calculation as if they were
outstanding for all periods presented.
Cash and Cash Equivalents
-------------------------
For purposes of the statements of cash flows, the Company considers all
highly liquid investments with a maturity of three months or less to be
cash equivalents.
Estimates
---------
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the reported amounts of
assets and
F-9
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies (Continued)
-----------------------------------------------------------------------
Estimates (Continued)
---------------------
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amount of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
2. Restatement of Financial Information
------------------------------------
The Company has restated its financial statements for the year ended
December 31, 1996 to eliminate the financial impact of barter credit
transactions. The Company took this action as a result of an inquiry by The
Nasdaq Stock Market and subsequent discussions with the Securities and
Exchange Commission concerning the Company's accounting for its barter
transactions.
The Company entered into barter agreements with Active Media Services, Inc.
in December, 1996 and SKR Resources, Inc. in May, 1997. The barter credits
were to be used for advertising, packaging and travel expenses, among other
items, to launch the Company's branded products in several retail markets.
These credits would have reduced the cash portion of the Company's
obligations for these services. The Company recorded the barter
transactions as revenue based on the wholesale price of each product
bartered. By September 30, 1997, cumulative revenues attributable to barter
sales for fiscal 1996 and 1997 were approximately $4.3 million.
Under the restatement, the Company has recorded the barter credits in an
amount equal to the carrying value of the inventory, which was reduced to
zero prior to the exchange. Therefore, no amounts have been recorded for
the barter credits.
In the opinion of management, all material adjustments necessary to correct
the financial statements have been recorded. The impact of these
adjustments on the Company's financial results as originally reported is
summarized below:
Year Ended December 31, 1996
----------------------------
As reported As restated
----------- -----------
Net sales $3,868,642 $3,116,130
Net income (loss) (2,635,895) (3,388,407)
Net income (loss) per share (.60) (.77)
Retained earnings (deficit) end of year (1,929,822) (2,682,334)
3. Restricted Cash
---------------
Cash of $54,629 was held as collateral by a bank for a letter of credit
issued to the lessor of the Company's manufacturing and warehouse
facilities.
4. Inventories
-----------
Inventories at December 31, 1996 consist of the following:
Raw materials and packaging $ 591,032
Work in process 361,059
Finished goods 414,853
----------
Total $1,366,944
==========
F-10
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
5. Long-Term Debt
--------------
Long-term debt consists of the following:
Obligations Under Capital Leases
--------------------------------
8.8% to 9.4% installment notes due in
2002 and 2003 with monthly principal and
interest payments of $30,057,
collateralized by equipment. At the end
of the lease term the Company may
purchase the equipment for a price equal
to the greater of the then fair market
value, or 20% of original cost of the
equipment, with the fair market value
not to exceed 30% of the original cost
of the equipment. If the Company does
not exercise the purchase option the
lease may be extended for an additional
one year term. $1,669,707
9.4% installment notes due in 2002 with
monthly principal and interest payments
of $1,000, collateralized by equipment. 41,914
----------
Total Long-Term Debt 1,711,621
Less current portion of long-term debt (223,567)
----------
Long-Term Debt $1,488,054
==========
Installments due on debt principal, including the capital leases, at
December 31, 1996 are as follows:
Year Ending
December 31,
1997 $ 223,567
1998 245,158
1999 268,837
2000 294,806
2001 313,996
Later Years 365,257
----------
Total $1,711,621
==========
F-11
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
6. Income Taxes
------------
The components of the provision for income taxes are as follows:
1996 1995
---- ----
Current:
Federal $(232,371) $234,440
State -- 36,410
--------- --------
Total (232,371) 270,850
--------- --------
Deferred:
Federal -- --
State -- --
--------- --------
Total -- --
--------- --------
Total Provision
for Income Taxes $(232,371) $270,850
========= ========
The $232,371 benefit for income taxes for the year ended December 31, 1996
is the result of the carryback of the net operating loss for 1996 to prior
tax years which resulted in an income tax refund receivable of $234,440.
The provision (benefit) for income taxes reconciles to the amount computed
by applying the federal statutory rate to income before the provision
(benefit) for income taxes as follows:
1996 1995
---- ----
Federal statutory rate (34)% 34%
State franchise taxes,
net of federal benefits (5) 3
Valuation allowance 32 --
Other (1) (2)
--- --
Total (8)% 35%
=== ==
The following is a reconciliation of the provision for income taxes to
income before provision for income taxes computed at the federal statutory
rate of 34%.
1996 1995
---- ----
Income taxes at the federal
statutory rate $(975,210) $261,229
State income taxes, net of
federal taxes (135,712) 25,355
Net operating loss carryover -- (12,372)
Nondeductible expenses 6,550 4,157
Valuation allowance 912,512 --
Other (40,511) (7,519)
---------- --------
Total $(232,371) $270,850
========= ========
Significant components of deferred income taxes as of December 31, 1996 are
as follows:
Net operating loss carryforward $ 862,493
Depreciation 63,825
Other (13,806)
---------
Total deferred tax asset 912,512
Less valuation allowance (912,512)
---------
Net Deferred Tax Asset $ --
=========
F-12
<PAGE>
6. Income Taxes (Continued)
------------------------
The Company has assessed its past earnings history and trends, sales
backlog, budgeted sales, and expiration dates of carryforwards and has
determined that is more likely than not that no deferred tax assets will be
realized. The valuation allowance of $912,512 is maintained on deferred tax
assets which the Company has not determined to be more likely than not
realizable at this time. The Company will continue to review this valuation
on a quarterly basis and make adjustments as appropriate.
At December 31, 1996, the Company had federal and state net operating loss
carryforwards of approximately $2,300,000 and $3,000,000, respectively.
Such carryforwards expire in the year 2011 and 2001 for federal and state
purposes, respectively.
7. Stockholder's Equity
--------------------
Private Offering of Common Stock
--------------------------------
In January 1996, the Company sold 619,175 shares of its common stock at
$5.00 per share through an Underwriter. The Company paid a sales commission
of 10% of the gross proceeds of the common stock sold. All of the net
proceeds of the offering ($2,786,288) were used to repurchase from Brett
Bouchy, a principal stockholder of the Company, and retire, 619,175 shares
of the Company's common stock held by
F-13
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
7. Stockholder's Equity (Continued)
---------------------------------
Private Offering of Common Stock (Continued)
--------------------------------------------
Mr. Bouchy at a repurchase price of $4.50 per share. Other expenses of the
offering, including legal fees, accounting fees, printing and other
expenses were paid by Mr. Bouchy.
Public Stock Offering
---------------------
The closing for the Company's IPO occurred on April 30, 1996. The Company
sold 400,000 units of its securities, each unit consisting of three shares
of the Company's common stock and one redeemable common stock purchase
warrant to the public at $18.00 per unit. Each warrant is exercisable to
purchase one share of common stock at $7.50 per share for a period of five
years until April 24, 2001 and may be redeemed by the Company for $.01 per
warrant if the closing price of the common stock on the NASDAQ National
Market System is at least $9.00 per share for 20 consecutive trading days.
In May 1996, the Underwriter exercised its option to purchase an additional
60,000 units from the Company to cover over-allotments.
The Company paid the Underwriter a commission equal to ten percent of the
gross proceeds of the offering and a non-accountable expense allowance
equal to three percent of the gross proceeds of the offering. In connection
with the offering, the Company issued the Underwriter a warrant, for $100,
to purchase up to 40,000 units for $24.75 per unit. The Underwriter's
warrant is exercisable for a period of four years beginning April 24, 1997.
The units subject to the Underwriter's warrant are identical to the units
sold to the public.
8. Stock Option and Warrants
-------------------------
Stock Option Plan
-----------------
In March 1995, the Company adopted a stock option plan (the "Plan") which
provides for the grant of both incentive stock options and non-qualified
options. A total of 1,200,000 shares of common stock have been reserved for
issuance under the Plan. The Plan was amended in May 1996 to increase the
shares available for issuance to 1,500,000. Incentive stock options are
issuable only to eligible officers, directors, key employees and
consultants of the Company. The Plan is administered by a committee
selected by the Board of Directors, which determines those individuals who
shall receive options, the time period during which the options may be
exercised, the number of shares of common stock that may be purchased under
each option, and the option price. Unless sooner terminated, the Plan shall
remain in effect until January 1, 2005.
The per share exercise price of the common stock may not be less than the
fair market value of the common stock on the date the option is granted.
The aggregate fair market value (determined as of the date the option is
granted) of the common stock that any employee may purchase in any calendar
F-14
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
8. Stock Options and Warrants (Continued)
--------------------------------------
Stock Option Plan (Continued)
-----------------------------
year pursuant to the exercise of incentive stock options may not exceed
$100,000. No person who owns, directly or indirectly, at the time of the
granting of an incentive stock option to him, more than 10% of the total
combined voting power of all classes of stock of the Company shall be
eligible to receive any incentive stock options under the Plan unless the
option price is at least 110% of the fair market value of the common stock
subject to the option, determined on the date of grant.
The exercise date of an option granted under the Plan cannot be later than
three years from the date of grant. All options granted under the Plan
provide for the payment of the exercise price in cash or, with the prior
written consent of the Company, by delivery to the Company of shares of
common stock already owned by the optionee having a fair market value equal
to the exercise price of the options being exercised, or by a combination
of such methods of payment.
The following table contains information on the stock options under the
Company's Plan for the years ended December 31, 1995 and 1996. The
outstanding agreements expire from March 1998 to December 1999.
Number of Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at
January 1, 1995 -- $ --
Granted 750,000 1.64
Exercised -- --
Cancelled -- --
--------- -----
Options outstanding at
December 31, 1995 750,000 1.64
Granted 700,000 6.11
Exercised (132,000) 1.77
Cancelled -- --
--------- -----
Options outstanding at
December 31, 1996 1,318,000 $4.00
========= =====
Non-qualified Stock Options
---------------------------
The Company has granted non-qualified stock options to consultants,
distributors and other individuals. The outstanding agreements expire from
April 1998 to October 1998. The following table contains information on all
of the stock options, except those granted under the Company's stock option
plan, for the years ended December 31, 1995 and 1996.
F-15
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
8. Stock Options and Warrants (Continued)
---------------------------------------
Non-qualified Stock Options (Continued)
---------------------------------------
Number of Weighted Average
Shares Exercise Price
------ --------------
Options outstanding at
January 1, 1995 -- $ --
Granted 500,000 2.98
Exercised -- --
Cancelled -- --
------- -----
Options outstanding at
December 31, 1995 500,000 2.98
Granted -- --
Exercised -- --
Cancelled (140,000) 6.00
-------- -----
Option outstanding at
December 31, 1996 360,000 $1.80
======== =====
The Company adopted Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123) during the year ended December 31,
1996. In accordance with the provisions of SFAS 123, the Company applies
APB Opinion No. 25, "Accounting for Stock Issued to Employees, " and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
options granted to non-employees. If the Company had elected to recognize
compensation expense based upon the fair value at the grant date for awards
under these plans consistent with the methodology prescribed by SFAS 123,
the Company's net income and earnings per share would be reduced to the
following pro forma amounts:
1996 1995
---- ----
Net income (loss):
As reported $(3,388,407) $497,471
Pro forma $(4,937,720) $349,508
Net income (loss) per
share of common stock:
As reported $ (.77) $.11
Pro forma $(1.12) $.08
These pro forma amounts may not be representative of future disclosures
since the estimated fair value of stock options is amortized to expense
over the vesting period and additional options may be granted in future
years. The fair value for these options was estimated at the date of grant
using the Black-Scholes option pricing model with the following assumptions
for the years ended December 31, 1996 and 1995.
F-16
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
8. Stock Options and Warrants (Continued)
--------------------------------------
1996 1995
---- ----
Risk-free interest rate 5.88% 6.44%
Expected life 2 years 2 years
Expected volatility 58.73% .5%
Expected dividend yield 0% 0%
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in subjective input assumptions can materially
affect the fair value estimates, in management's opinion, the existing
models do not necessarily provide a reliable single measure of the fair
value of its employee stock based compensation plans.
The following table summarized information about stock based compensation
plans outstanding at December 31, 1996:
Options Outstanding and Exercisable by Price Range as of December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life-Years Price Exercisable Price
------ ----------- ---------- ----- ----------- -----
<S> <C> <C> <C> <C> <C>
$1.50 - 2.00 618,000 1.25 $1.61 618,000 $1.61
$6.00 - 6.13 700,000 2.94 $6.11 700,000 $6.11
------------ --------- ---- ----- --------- -----
$1.50 - 6.13 1,318,000 2.15 $4.00 1,318,000 $4.00
============ ========= ==== ===== ========= =====
</TABLE>
Warrants
--------
In 1995, the Company borrowed $1,550,000 from a group of four lenders
("1995 Bridge Loan"). As additional consideration for the 1995 Bridge Loan,
the Company issued an aggregate of 465,000 common stock purchase warrants
to the lenders. Each warrant is exercisable to purchase one share of the
Company's common stock at $2.00 per share in perpetuity. All 465,000 of the
warrants are outstanding at December 31, 1996.
F-17
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
9. Preferred Stock
---------------
The authorized preferred stock of the Company consists of 1,000,000 shares,
no par value. The preferred stock may be issued in series from time to time
with such designation, rights, preferences and limitations as the Board of
Directors of the Company may determine by resolution. The rights,
preferences and limitations of separate series of preferred stock may
differ with respect to such matters as may be determined by the Board of
Directors, including without limitation, the rate of dividends, method and
nature of payment of dividends, terms of redemption, amounts payable on
liquidation, sinking fund provisions (if any), conversion rights (if any),
and voting rights. Unless the nature of a particular transaction and
applicable statutes require approval, the Board of Directors has the
authority to issue these shares without shareholder approval.
10. Commitments and Contingencies
-----------------------------
Leases
------
The Company leases its office facilities, manufacturing and warehouse
facilities and certain equipment under long-term leasing arrangements. The
Company's manufacturing and warehouse facilities lease contains two three
year renewal options. In addition, the Company's executive offices contains
a two year renewal option. The following is a schedule of future minimum
lease payments at December 31, 1996 under the Company's capital leases
(together with the present value of minimum lease payments) and operating
leases that have initial or remaining noncancellable lease terms in excess
of one year:
Year Ending Capital
December 31, Leases Facilities Total
------------ ------ ---------- -----
1997 $ 372,692 $ 156,109 $ 528,801
1998 372,692 163,832 536,524
1999 372,692 125,915 498,607
2000 372,692 131,976 504,668
2001 363,689 132,527 496,216
Thereafter 385,412 555,980 941,392
---------- ---------- ----------
Total Minimum
Lease Payments 2,239,869 $1,266,339 $3,506,208
========== ==========
Less amount
representing
interest 528,248
----------
Present Value
of Net Minimum
Lease Payments $1,711,621
==========
Rental expense charged to operations was $176,994 and $53,362 for the years
ended December 31, 1996 and 1995, respectively.
F-18
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
10. Commitments and Contingencies (Continued)
-----------------------------------------
Leases (Continued)
------------------
Leased equipment under capital leases as of December 31, 1996 is as
follows:
Equipment $1,900,951
Less accumulated depreciation 227,781
----------
Net Property and Equipment Under
Capital Leases $1,673,170
==========
Employment Agreements
---------------------
In January 1996, the Company entered into an employment agreement with Mr.
Bernstein through December 31, 2000 which may be extended until December
31, 2005 at Mr. Bernstein's option if the Company's net sales (as
hereinafter defined) for the calendar year ending December 31, 2000 exceed
$50 million. Under the employment agreement, Mr. Bernstein is to receive a
base salary of $100,000 with subsequent annual base salaries equal to 2% of
the Company's prior year's net sales but in no event may such annual base
salary exceed $500,000. "Net sales" are defined as gross sales from the
sale of all products in the "Target Markets", which in turn are defined as
all markets except (i) the natural food markets, (ii) private label markets
or (iii) markets developed from direct response television infomercial
advertising. In addition, Mr. Bernstein is entitled to an annual bonus
equal to (i) 5% of the first $5 million of net sales in excess of the prior
year's net sales, (ii) 4% of the next $5 million of net sales in excess of
the prior year's net sales, (iii) 3% of the next $5 million of net sales in
excess of the prior year's net sales and (iv) 2% of all net sales in excess
of $20 million of net sales in the prior year.
11. Related Party Transactions
--------------------------
On November 18, 1994, Gregory Gossett, the Company's founder, President and
majority stockholder, sold 1,550,000 shares of his common stock in the
Company to Dale Holdings, Inc., LDC ("Dale") for $750,000, or $.48 per
share. On the same date, the Company sold an additional 516,740 shares to
Dale for $250,000, or $.48 per share.
In February 1995, Dale sold an aggregate of 367,150 shares of common stock
of the Company held by it to a group of eleven investors for $560,000, or
$1.53 per share. After paying commissions of $56,000, Dale loaned the
remaining $504,000 to the Company, evidenced by a promissory note. In May
1995 the Company and Dale each sold 420,000 shares of the Company's common
stock through an Underwriter at $1.80 per share and paid a commission of
10% of the gross proceeds of the common stock. Dale loaned the Company
$346,000 from the proceeds of the common stock sold by it, which is
evidenced by a promissory note. Both loans from Dale were collateralized by
all of the Company's accounts receivable,
F-19
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
11. Related Party Transactions (Continued)
--------------------------------------
inventory and equipment. The notes were distributed to Dale's two partners
in December 1995 and the notes were subordinated to the Company's equipment
lease and were repaid in 1996.
On March 24, 1995, the Company entered into an employment agreement with
Richard Ratcliff, its then Chief Executive Officer, which provides for a
salary, bonus, stock options and loan to Mr. Ratcliff. In March 1996, the
employment agreement was amended to delete the bonus provision.
The Company entered into exclusive U.S. and foreign distribution agreements
(the "Distribution Agreements") with Bernstein Bros. Marketing Incorporated
(doing business as National Distributing) ("National"). National held
exclusive rights to market the Company's ChromaTrim gum to retailers within
the United States, except retailers in the natural food industry, the
private label market or directly to customers ("direct response") through
media advertisements and infomercials broadcast on cable television
networks. United Merchants, Inc. ("UMI") held rights to market the same
products on a direct response basis within the United States and both on a
direct response basis and to retail accounts outside the United States.
In January 1996, the Company, National and UMI cancelled their exclusive
U.S., and foreign Distribution Agreements. The Company entered into a two
year agreement with National pursuant to which the Company agreed to sell
National, on a non-exclusive basis, ChromaTrim and CitrusSlim chewing gum
for sale by National solely to non-chain convenience stores, grocery
stores, drugstores and other similar retail food stores. The Company
entered into a two year agreement with UMI pursuant to which the Company
agreed to sell to UMI on a non-exclusive basis ChromaTrim and CitrusSlim
chewing gum for sale by UMI solely in the United States through direct
response television infomercial advertising.
Richard Bernstein, a director of the Company, is an executive officer and
director of National and a principal stockholder of UMI. The Distribution
Agreements, which primarily relate to the Company's ChromaTrim chewing gum,
represented 21.0% and 69.5% of the Company's total sales for the years
ended December 31, 1996 and 1995, respectively. Trade accounts receivable
from National and UMI combined were $227,047 and $775,130 at December 31,
1996 and 1995, respectively. Payments are generally due within 30 days of
the invoice date.
The Company loaned $100,000 to National at 8% interest in December 1994
which was evidenced by a promissory note due in 1995. The $100,000
principal and $3,000 interest was repaid to the Company in March 1995.
F-20
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
11. Related Party Transactions (Continued)
--------------------------------------
The Company has notes receivable from officers and directors as of December
31, 1996, as follows:
8% unsecured note due from the Company's
Senior Vice President, with principal
and interest due in December 1997. $100,000
8% unsecured note due from the Company's
Vice President, with principal and
interest due in January 1998. 150,000
8% unsecured note due from the Company's
President and CEO, with principal and
interest payable out of stock sale
profits, if stock sale profits are not
sufficient to repay the loan by November
1999, then the balance will be converted
to compensation. 66,000
--------
Total $316,000
========
The Company repaid notes payable to stockholders in the amount of
$2,150,000 in 1996 together with interest at 8% in the amount of
$159,943.
12. Concentration of Credit Risk and Major Customers
------------------------------------------------
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments and accounts receivable. The Company places its cash
equivalents and short term investments with high credit quality
financial institutions and limits its credit exposure with any one
financial institution. The Company's accounts receivable are due from
customers located throughout the United States and various foreign
countries. The Company performs periodic credit evaluations of its
customers' financial condition and generally requires no collateral.
The Company obtains letters of credit form its foreign customers to
limit its exposure to credit risk on its accounts receivable. The
Company maintains reserves for potential credit losses, and such
losses have not exceeded management's expectations.
Sales to major customers, as a percentage of net sales, for the years
ended December 31, 1996 and 1995 were as follows:
1996 1995
---- ----
Customer A 17.5% 42.8%
Customer B 26.7%
Customer C 13.8%
Customer D 10.2%
F-21
<PAGE>
GUM TECH INTERNATIONAL, INC.
NOTES TO FINANCIAL STATEMENTS
13. Subsequent Events
-----------------
On March 6, 1997, the Company completed the sale of $2,530,000 of
convertible debentures. The convertible debentures bear interest at
11% per annum which is payable on a quarterly basis. The debentures
are interest only until January 1, 2000 at which time the principal
and interest will be paid in twenty-four equal monthly installments
through January 1, 2002. The debentures are convertible into shares of
the Company's common stock at $4.75 per share. The common stock
issuable under the convertible debentures carries certain registration
rights after July 31, 1997 and are subject to a lock-up agreement with
the Company which prohibits the holder from selling their common stock
prior to January 31, 1998.
The Company paid the Private Placement Agent a commission of 10% of
the gross proceeds of the debentures.
F-22
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
------------------------------------------------
There have been no changes in or disagreements with accountants on
accounting or financial disclosure.
18
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
----------------------------------------------------------
Directors and Executive Officers
The name, age and position of each of the Company's executive officers and
directors are set forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard Ratcliff(1)(2) 62 Chairman of the Board of Directors and Senior Vice
President
Gerald N. Kern(1)(2) 59 Chief Executive Officer, President and Director
Lester Goldstein 52 Vice President of Operations
Gary S. Kehoe 38 Chief Operating Officer and Director
Richard Bernstein 36 Vice President of Marketing and Director
Roy Kaplan 62 Vice President of Sales
Jeffrey L. Bouchy 31 Secretary, Treasurer and Chief Financial Officer
William G. Meris(1) 31 Director
Robert J. Kwait(2) 61 Director
</TABLE>
- -----------
(1) Member of the Audit Committee.
(2) Member of the Stock Option Plan/Compensation Committee.
Directors hold office for a period of one year from their election at the
annual meeting of stockholders or until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors. The Company's executive officers were all leased
employees from the commencement of their employment with the Company through
December 31, 1995, when the Company's employee leasing agreement was cancelled
by it. In August 1996 and May 1996, respectively, Messrs. Earl K. Manhold III
and Robert H. Wood resigned as directors and in August 1996, Mr. Meris was
elected a director. In August 1996, (i) Mr. Ratcliff resigned as the Company's
Chief Executive Officer and was appointed its Chairman and Senior Vice
President, (ii) Mr. Epert resigned as President of the Company and was appointed
its Vice Chairman and Executive Vice President and (iii) Gerald N. Kern was
appointed Chief Executive Officer, President and a director. On December 5,
1996, Messrs. Epert and Gossett resigned as officers and directors and Robert J.
Kwait was appointed as a director. Mr. Monte resigned as a director in October
1996.
Background
The following is a summary of the business experience, for at least the
last five years, of each executive officer and director of the Company:
19
<PAGE>
Richard Ratcliff became Chief Executive Officer and a director of the
Company in March 1995. Mr. Ratcliff was the co-founder with Mr. Epert and an
executive officer of Food For Health Co., Inc., a health food distributor, from
1971 until he sold the company with Mr. Epert in 1991. From 1991 until he became
Chief Executive Officer of the Company in March 1995, he was a passive investor
for his own account. Since 1991, he has also been President of Niche, Inc., a
privately-held company through which he provides consulting services on matters
relating to the natural food industry. Mr. Ratcliff is also (i) a director of
First Community Financial Corp., an asset-based lender, (ii) a salaried officer,
director and principal stockholder of Meris Financial, Inc., a privately-held
investment firm, and (iii) was formerly a director of Interhealth Nutritionals,
Inc., a privately-held producer of health food ingredients, including an
ingredient used by the Company in one of its chewing gum products. See "Certain
Transactions." Mr. Ratcliff resigned as the Company's Chief Executive Officer in
August 1996 and is currently Chairman of the Board of Directors and Senior Vice
President of the Company. He devotes such time as is necessary to the Company's
affairs.
Gerald N. Kern became the Company's Chief Executive Officer, President and
a director in August 1996. From 1983 to 1994, he was President and Chief
Operating Officer of Meditech Pharmaceuticals, Inc., a manufacturer of
proprietary drugs. From August 1994 until August 1996, he was President of Aura
Interactive, a manufacturer of interactive consumer products. Prior to serving
at Meditech, Mr. Kern was the Executive Vice President and Chief Operating
Officer of Max Factor, one of the world's largest cosmetics companies, from 1977
to 1980. Mr. Kern was a division President and corporate Vice President for
International Playtex from 1967 to 1977.
Lester Goldstein was employed by Aura Systems from 1992 until he joined the
Company in November 1996 as an associate division manager, Vice President of
Consumer Products and ultimately Vice President of Operations. From 1989 to
1992, he was employed by TRW and from 1981 to 1989 by Rockwell International.
Mr. Goldstein earned a B.A. degree from Hofstra University, and an M.S. and Ph.D
degree in Physics from Polytechnic Institute of Brooklyn.
Gary S. Kehoe was employed by LifeSavers Company, a division of Nabisco
Food Group, Inc., in various capacities from 1976 until he joined the Company in
June 1995 as its Chief Operating Officer and a director. As a Senior Food
Technologist for LifeSavers, Inc., Mr. Kehoe developed six bubble gum flavors
and was listed as an inventor or co-inventor on 12 U.S. chewing gum patents
filed by Lifesavers, Inc.
Richard Bernstein joined the Company in January 1996 as its Vice President
of Marketing. Since 1991, he has also been President, a director and principal
stockholder of Bernstein Bros. Marketing Corporation (doing business as National
Distributing). National Distributing markets retail consumer products including
the Company's ChromaTrim and CitrusSlim chewing gum products. See "ITEM 12." Mr.
Bernstein graduated from the University of Southern California in 1981 with a
Bachelor of Science degree and became a director of the Company in April 1995.
He devotes such time as is necessary to the Company's affairs.
20
<PAGE>
Roy Kaplan was the President of Mayday, Inc., a manufacturer of motion
sickness products from 1989 to 1997. From 1984 to 1989, he was Vice President
and General Sales Manager of Mass Industries. He joined the Company in January
1997.
Jeffrey L. Bouchy earned his Bachelor of Science degree in Accounting from
Arizona State University in 1989 and his Master of Science degree in Sports
Management from West Virginia University in 1992. From 1992 to 1993, he was
assistant to the Director of Finance at the Charlotte Coliseum, a sports and
events facility in Charlotte, North Carolina. From 1993 until 1994, he was
President of Southwest Food Services, Inc., a privately-held fast food franchise
based in Phoenix, Arizona. From 1994 until he joined the Company in May 1995 as
its Chief Financial Officer, he was a production manager at Fun Tees, Inc., a
privately-held apparel manufacturer.
William G. Meris was employed by Prudential Securities, Inc. from 1987
until 1994, first as an intern in the Corporate Finance Department, and then as
a retail stockbroker from 1989 until April 1994. Subsequently, he was employed
as a retail stockbroker by Franklin-Lord, Inc. from May 1994 to August 1994.
From October 1994 until March 1995, Mr. Meris was a co-owner of Cyberia, Inc., a
virtual reality entertainment firm. From January 1995 until June 1995, he was
also a co-manager of Meris Financial, Inc., a private investment and consulting
company. Since June 1995, Mr. Meris has been President of WGM Corporation, which
acts as the General Partner of The Monolith Fund, a private investment limited
partnership. He is also a director of Interhealth Nutritionals, Inc. He earned a
Bachelor of Science degree in Business Administration from Arizona State
University.
Robert J. Kwait has been the President and controlling stockholder of
Robert J. Kwait & Associates, Inc. ("RJK") since 1981. RJK develops store brands
for retailers and contract manufacturers and has specialized in introducing
store brands for feminine hygiene, adult incontinence, sun care, vitamins,
diagnostics, infant products and over-the-counter cold remedies to drug store
chains. RJK serves as a manufacturing consultant and as a sales representative.
As a manufacturing consultant, RJK assists manufacturers in product development,
pricing strategies, packaging issues, marketing programs and retail trade
relations. As a sales representative, RJK introduces new products, develops
packaging, creates customer marketing programs for individual retailers and
provides retailers with industry updates including key market trends. Mr. Kwait
earned a Bachelor of Arts degree from Boston University and a Juris Doctorate
degree from Case Western Reserve University Law School.
Information With Respect to Delinquent Filers
Three of the Company's directors (Messrs. Epert, Bernstein and Gossett)
inadvertently failed to file one Form 4 each during the calendar year ended
December 31, 1996. Messrs. Epert and Bernstein subsequently filed a Form 5
reporting the Form 4 transaction.
21
<PAGE>
Significant Employee
Richard A. Sigtermans was Manager of Quality Control and Information
Systems for the Company from October 1995 until his promotion to Production
Manager in September 1996. In such capacity, Mr. Sigtermans is responsible for
chewing gum production and also administers the Company's management information
and quality assurance departments. From 1991 to 1993, he was employed by
Lifesavers Company, a division of Nabisco Food Group, Inc., in its new product
development group. From 1993 until he joined the Company in October 1995, he was
employed by Compac Corporation, a division of TriMas Corporation, first as its
Quality Project Coordinator and then as its Computer Operations Supervisor. Mr.
Sigtermans graduated from GMI Engineering & Management Institute with a Bachelor
of Science degree in 1991.
ITEM 10. EXECUTIVE COMPENSATION
----------------------
None of the Company's executive officers or directors currently receive
compensation in excess of $100,000 per year except Mr. Kern, Mr. Goldstein and
Mr. Kaplan. See below.
On August 21, 1996, the Company entered into an employment agreement with
Mr. Kern through December 31, 1997 extendable at the Company's option for an
additional one year. Under the employment agreement, Mr. Kern receives a salary
of $150,000 per year (with annual increases of $50,000 beginning in August
1997), was granted an option to purchase 50,000 shares of the Company's Common
Stock at $6.00 per share under the 1995 Stock Option Plan and was advanced a
loan of $66,000 from the Company. Mr. Kern will receive a bonus equal to 5% of
the Company's after tax net income for the year ending December 31, 1997, if his
employment is extended for the 1998 calendar year. In December 1996, the Company
extended Mr. Kern's employment agreement and his stock options for three
additional years through December 31, 2000.
On September 1, 1996, the Company entered into an employment agreement with
Mr. Goldstein, the Company's Vice President of Operations, terminable upon 30
days notice by either party. The employment agreement provides for a salary of
$120,000 annually through December 31, 1997 and $145,000 annually for the year
ending December 31, 1998. Mr. Goldstein will also receive a bonus equal to 1% of
the Company's after tax net income for the years ended December 31, 1997 and
1998, prorated if his employment is terminated prior to end of either calendar
year.
On January 1, 1997, Roy Kaplan, a Vice President of the Company, entered
into an employment agreement with the Company for the same employment term and
providing for the same salary and bonus as Mr. Goldstein.
22
<PAGE>
The following table discloses certain compensation paid to the Company's
executive officers for the years ended December 31, 1994, 1995 and 1996.
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation
Annual Compensation Awards Payouts
------------------- -----------------------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Name
and
Prin- Other All
cipal Annual Restricted Other
Posi- Compen- Stock Options/ LTIP Compen-
tion Year Salary($) Bonus($) sation($) Award(s)($) SARS(#) Payouts($) sation($)
- ----- ---- --------- -------- --------- ----------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gregory W.
Gossett, 1994 26,460 0 0 0 0 0 0
President 1995 0 0 31,000(1) 0 0 0 0
Richard
Ratcliff,
Chief
Executive 1995 27,500 0 0 0 520,000(2) 0 0
Officer 1996 54,000 0 0 0 0 0 0
Gerald N.
Kern,
Chief
Executive
Director 1996 56,250 0 0 0 300,000(3) 0 0
</TABLE>
- -----------
(1) Represents consulting fees paid by the Company.
(2) Represents options to purchase up to 520,000 shares at $1.50 per share
until March 1998.
(3) Represents options to purchase 50,000 shares at $6.00 per share until
August 1999 and 250,000 at $6.125 per share until December 1999.
Option Grants in Last Year and Stock Option Grant
The following table provides information on option grants during the year
ended December 31, 1996 to the named executive officers:
<TABLE>
<CAPTION>
% of Total
Options Granted
Options to Employees Exercise Expiration
Name Granted in the Year Price Date
---- ------- ----------- ----- ----
<S> <C> <C> <C> <C>
Gerald N. Kern 50,000(1) 7.2% $6.00(1) August 1999(1)
Gerald N. Kern 250,000 35.7% $6.13(1)
December 1999(1)
</TABLE>
(1) See footnote (1) to the Summary Compensation Table.
23
<PAGE>
Aggregate Option Exercise in Last Year and Year-End Option Values
The following table provides information on the value of the named
executive officer's unexercised options at December 31, 1996. An aggregate of
132,000 shares of Common Stock were acquired upon exercise of options during the
year ended December 31, 1996.
<TABLE>
<CAPTION>
Value of Unexercised
Number of Unexercised In-The-Money Options
Options at Year End (1) at Year End (1)
----------------------- ---------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard Ratcliff 468,000 0 $2,164,500 0
Gerald N. Kern 300,000 0 $ 6,250 0
</TABLE>
(1) Based upon a price of $6.125 per share on December 31, 1996.
The Company's nonsalaried directors receive reimbursement for out-of-pocket
expenses incurred in attending Board of Directors' meetings and have been
granted stock options under the Company's 1995 Stock Option Plan.
1995 Stock Option Plan
In March 1995, the Company adopted a stock option plan (the "Plan") which
provides for the grant of options intended to qualify as "incentive stock
options" and "nonqualified stock options" within the meaning of Section 422 of
the United States Internal Revenue Code of 1986 (the "Code"). Incentive stock
options are issuable only to eligible officers, directors, key employees and
consultants of the Company.
The Plan is administered by the Compensation Committee of the Board of
Directors which is comprised of nonemployee directors. At December 31, 1996, the
Company had reserved 1,500,000 shares of Common Stock for issuance under the
Plan. Under the Plan, the Board of Directors determines which individuals shall
receive options, the time period during which the options may be partially or
fully exercised, the number of shares of Common Stock that may be purchased
under each option and the option price.
The per share exercise price of the Common Stock may not be less than the
fair market value of the Common Stock on the date the option is granted. No
person who owns, directly or indirectly, at the time of the granting of an
incentive stock option, more than 10% of the total combined voting power of all
classes of stock of the Company is eligible to receive incentive stock options
under the Plan unless the option price is at least 110% of the fair market value
of the Common Stock subject to the option on the date of grant.
24
<PAGE>
No options may be transferred by an optionee other than by will or the laws
of descent and distribution, and during the lifetime of an optionee, the option
may only be exercisable by the optionee. Options may be exercised only during
the time the option holder is an employee of the Company or within 90 days of
termination of such employment if a Registration Statement on Form S-8 ("S-8")
covering the underlying shares was effective as of the date of termination of
employment. If an S-8 covering the underlying shares was not effective on the
date of termination, then the employee has one year following termination to
exercise the options. If an employee is terminated for cause, any unexercised
options will be cancelled as of the date of such termination. Options under the
Plan must be granted within three years from the effective date of the Plan and
the exercise date of an option cannot be later than three years from the date of
grant. Any options that expire unexercised or that terminate upon an optionee's
ceasing to be employed by the Company become available once again for issuance.
Shares issued upon exercise of an option will rank equally with other shares
then outstanding.
As of February 28, 1997, 1,228,000 unexercised options had been granted
under the Plan to executive officers and directors and were currently
outstanding. The per share exercise prices represented the fair market value of
the Company's Common Stock at the date such options were granted, based on prior
sales of the Company's Common Stock. The table below sets forth the total number
of options issued to each executive officer and director of the Company and the
exercise price. Messrs. Kehoe's and Bouchy's options are exercisable until June
1, 1998. All other options are exercisable at various times through January
2000. To date, a total of 132,000 stock options have been exercised.
Total Number of
Name of Executive Options Issued Exercise Price
----------------- -------------- --------------
John E. Epert 20,000 $1.80
Richard Ratcliff 468,000 1.50
Gary S. Kehoe 150,000 2.00 to $6.125
Jeffrey L. Bouchy 100,000 2.00 to $6.125
Robert H. Wood 20,000 2.00
William G. Meris 20,000 6.125
Gerald N. Kern 300,000 6.00 to $6.125
Lester Goldstein 50,000 6.125
Robert J. Kwait 20,000 6.375
Richard Bernstein 30,000 6.125
Roy Kaplan 50,000 6.125
---------
TOTAL 1,228,000
=========
In addition to the above options issued to executive officers and
directors, 202,500 options have been issued to employees ranging in exercise
price from $6.125 to $6.375 per share. Additionally, the Company has agreed to
issue 100,000 options to three individuals (50,000 options exercisable at $4.50
per share and 50,000 options exercisable at $5.00 per share) for investment
banking consulting services.
25
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
The following table sets forth information concerning the holdings of
Common Stock (without giving effect to any shares issuable upon exercise of the
Public Warrants or the Prior Representative's Unit Warrants) by each person who,
as of the date of this Report, holds of record or is known by the Company to
hold beneficially or of record, more than 5% of the Company's Common Stock, by
each director, and by all directors and executive officers as a group. All
shares are owned beneficially and of record. The address of all persons (unless
otherwise noted in the footnotes below) is in care of the Company at 4205 North
7th Avenue, Phoenix, Arizona 85013.
Amount of Percent of
Name Ownership Class
- ----- --------- -----
Gerald N. Kern(1) 300,000 5.7
Richard Ratcliff(2) 468,000 8.6
Gary S. Kehoe(3) 290,000 5.6
Jeffrey L. Bouchy(4) 102,000 2.0
Gregory W. Gossett 265,000 5.4
William G. Meris(5) 20,000 .4
Richard Bernstein(6) 30,000 .6
Riverlux Trust REG(7) 645,265 13.0
Karl B. Berger(8) 450,000 8.8
Bruce Jorgenson(9) 250,000 5.1
Robert J. Kwait(10) 20,000 .4
Lester Goldstein(11) 50,000 1.0
All officers and directors as
a group (9 persons)
(1)(2)(3)(4)(5)(6)(10)(11) 1,280,000 20.7
- -----------
(1) Includes options to purchase 50,000 shares at $6.00 per share until August
1999 and 250,000 shares at $6.125 per share until December 1999. Does not
include an option to purchase 50,000 shares from Mr. Ratcliff at $6.00 per
share. See "Item 12."
(2) Includes options to purchase up to 468,000 shares at $1.50 per share until
March 1998. Does not include an option held by Mr. Kern to purchase 50,000
shares from Mr. Ratcliff at $6.00 per share. See "Item 12."
(3) Includes warrants to purchase 100,000 shares at $2.00 per share in
perpetuity and options to purchase 50,000 shares at $2.00 per share until
June 1998 and 100,000 shares at $6.125 at any time until December 1999.
(4) Represents options to purchase 20,000 shares at $2.00 per share until June
1998, 20,000 shares at $2.00 per share until October 1998 and 60,000 shares
at $6.125 per share until December 1999.
(5) Represents options to purchase 20,000 shares at $6.125 per share until
August 1999.
(6) Represents options to purchase 30,000 at $6.125 per share until December
1999.
26
<PAGE>
(7) Riverlux Trust REG, whose address is Baahofstrasse 23, CH 6301, Zug,
Switzerland, is a Liechtenstein company wholly owned and controlled by
Willy P. Verhaegen, Hans P. Bruellman and Doris Moeckli.
(8) Includes warrants to purchase 150,000 shares at $2.00 per share exercisable
in perpetuity. Mr. Berger's address is 97 Patterson Road, Joliet, Illinois
60434.
(9) Dr. Jorgenson's address is 1580 Antelope Drive, #100, Layton, Utah 84041.
(10) Includes options to purchase 20,000 shares at $6.375 per share until
January 2000.
(11) Represents options to purchase 50,000 shares at $6.125 per share until
December 1999.
27
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The Company was incorporated on February 4, 1991. Between the date of
incorporation and November 1994, the Company issued an aggregate of 2,500,000
shares of its Common Stock to officers, directors and business associates for an
aggregate of $29,000, or $.012 per share.
In November 1994, Gregory W. Gossett, the Company's founder, President and
majority stockholder, sold 1,550,000 shares of his Common Stock in the Company
to Dale Holdings, LDC ("Dale") for $750,000, or $.48 per share. On the same
date, the Company sold an additional 516,740 shares to Dale for $250,000, or
$.48 per share. Accordingly, as of November 1994, Dale was the majority
stockholder of the Company, owning an aggregate of 2,066,740 shares, or 68.5% of
the Company's then outstanding Common Stock. At that time (and until December
1995) Dale was owned 51% by Riverlux Trust REG, a Liechtenstein company, and 49%
by Brett Bouchy. In January 1995 Dale purchased 24,850 shares from Miguel
Paloma, a nonaffiliated stockholder of the Company.
In February 1995, Dale sold an aggregate of 367,150 shares of Common Stock
of the Company held by it to a group of investors for $560,000, or $1.53 per
share. After paying commissions of $56,000, Dale loaned the remaining $504,000
to the Company, evidenced by a promissory note bearing interest at 8% per annum,
which was paid in full with proceeds of the Prior Offering. Proceeds of the loan
were used by the Company to (i) purchase inventory, (ii) provide Mr. Ratcliff
with the $100,000 loan required under his employment agreement, (iii) pay cash
dividends to the Company's stockholders aggregating $37,449, (iv) repay a
stockholder loan in the amount of $43,000, (v) pay legal and accounting fees and
(v) satisfy working capital needs, including the purchase of inventory.
On March 24, 1995, the Company entered into an employment agreement with
Richard Ratcliff, its Chief Executive Officer, which provides for a salary,
bonus and loan to Mr. Ratcliff. On June 1, 1995, the Company entered into
employment agreements with Messrs. Manhold, Kehoe and Bouchy. In January 1996,
the Company entered into employment agreements with Messrs. Epert and Bernstein
and in August 1996 the Company entered into an employment agreement with Mr.
Kern. Subsequently, Messrs. Ratcliff, Epert and Manhold voluntarily terminated
their employment agreements and Messrs. Ratcliff and Epert entered into new
employment agreements in August 1996, effective through December 31, 1997. See
"Item 10 - Executive Compensation."
In May 1995, the Company sold 420,000 shares of its Common Stock to a group
of non-affiliated investors for $1.80 per share. At the same time, Dale also
sold 420,000 shares of the Company's Common Stock owned by it for $1.80 per
share to a group of investors.
In June 1995, Dale loaned the Company $346,000 evidenced by a promissory
note bearing interest at 8% per annum due the earlier of June 19, 1997, or the
closing date of the Offering. This second Dale loan resulted from the
aforementioned sale by Dale in May 1995 of 420,000 shares of the Company's
Common Stock at $1.80 per share. The two loans from Dale which aggregate
28
<PAGE>
$850,000 were collateralized by all of the Company's accounts receivable,
inventory and equipment (subordinated to the Textron Financial Corporation
equipment lease) and were repaid in full from the proceeds of the Prior
Offering.
In April and October 1995, the Company issued 40,000 and 100,000 stock
options respectively to Meris Financial Incorporated ("Meris") for consulting
services rendered to the Company including services rendered in connection with
the Offering. The options were exercisable at $6.00 per share and were to expire
three years from the date of issuance. In March 1996, at the Company's request,
Meris agreed to cancel its options in order to assist the Company in compliance
with certain NASD rules which limit the number of options and warrants issuable
in connection with a public offering.
In October 1995, the Company borrowed $1,550,000 from a group of four
lenders (the "1995 Bridge Loan"). As additional compensation for the 1995 Bridge
Loan, the Company issued an aggregate of 465,000 common stock purchase warrants
to the lenders, each such warrant exercisable to purchase one share of the
Company's Common Stock at $2.00 per share exercisable in perpetuity. The Bridge
Loan bore interest at 8% per annum and was repaid in full from proceeds of the
Prior Offering. The Bridge Loan lenders included Brett Bouchy, a former
principal stockholder of the Company (who received 165,000 warrants), and Robert
H. Wood, a former director of the Company (who received 75,000 warrants). In
March 1996, Brett Bouchy sold 100,000 warrants to Gary S. Kehoe and 65,000
warrants to Robert H. Wood, both officers and directors of the Company, for
$5.00 per warrant. The purchase price was paid by the issuance of promissory
notes by Messrs. Kehoe and Wood to Mr. Bouchy bearing interest at 9% per annum.
The warrants are not collateral for the promissory notes. The promissory notes
are due the earlier of (i) six months after the warrants are exercised or (ii)
if during the period commencing from April 24, 1997 until April 24, 2000 the
closing price of the Company's Common Stock on NASDAQ is $10.00 or more per
share for five consecutive trading days then the promissory notes are due six
months from the last such trading day. If neither event occurs, the promissory
notes becomes void and of no value on April 24, 1999 and the warrants remain the
property of Messrs. Kehoe and Wood. Under no circumstances will the warrants
become returnable to Mr. Bouchy. Mr. Bouchy sold the warrants in response to
comments from the National Market who had advised the Company that neither
NASDAQ nor the National Market would list the Company's securities so long as
Mr. Bouchy was an equity holder in the Company. The National Market's objection
to allowing Mr. Bouchy to remain an equity holder in the Company resulted from
fines and censures imposed upon Mr. Bouchy by the NASD and the Securities
Commission of the State of Arizona.
In December 1995, Dale dissolved and issued 51% and 49% respectively of its
Common Stock in the Company and its loans receivable due from the Company to
Riverlux Trust REG and Brett Bouchy. Riverlux Trust REG and Brett Bouchy
received 665,265 shares and 639,175 shares, respectively, of Dale's
stockholdings in the Company and $433,500 and $416,500, respectively, of Dale's
loans receivable from the Company. The loans were repaid in full out of proceeds
of the Prior Offering. Subsequently, Riverlux Trust REG and Mr. Bouchy each sold
20,000 shares of the Company's Common Stock to Mr. Kehoe for $2.00 per share.
29
<PAGE>
In January 1996, the Company repurchased from Brett Bouchy, the remaining
619,175 shares of the Company's Common Stock owned by him for $4.50 per share
resulting in a gain to Mr. Bouchy of $2,489,083. In order to fund the repurchase
and retirement of such shares, the Company sold in a January 1996 private
placement of its Common Stock an aggregate of 619,175 shares to the Selling
Stockholders for $4.50 per share after payment of commissions. The Company
repurchased Brett Bouchy's shares in response to comments from the National
Market as set forth in the carry over paragraph above. Without a NASDAQ or
National Market listing, the Company would have been unable to complete a public
offering of its securities.
In January 1996, the Company entered into a two-year distribution agreement
with Bernstein Bros. Marketing Corporation (doing business as National
Distributing) (a company in which Richard Bernstein, an officer and director of
the Company, is President, a director and a principal stockholder) pursuant to
which the Company agreed to sell to National Distributing at fixed product
prices on a non-exclusive basis ChromaTrim and CitrusSlim chewing gum for
distribution by National Distributing solely to non-chain convenience stores,
grocery stores, drugstores and other similar retail food stores. There are no
minimum sales requirements imposed under the agreement. The Company considers
the product prices offered to National Distributing under the agreement to be
fair, reasonable and consistent with product prices which would be offered to
unaffiliated distributors. Sales by National Distributing of ChromaTrim chewing
gum under a prior distribution agreement with the Company accounted for 42.8%
and 17.5% of the Company's total sales for the years ended December 31, 1995 and
1996 respectively.
In January 1996, the Company entered into a two-year distribution agreement
with Universal Merchants, Inc. ("UMI") (a company in which Richard Bernstein, an
officer and director of the Company was formerly a principal stockholder)
pursuant to which the Company agreed to sell to UMI at fixed product prices on a
non-exclusive basis ChromaTrim and CitrusSlim chewing gum for distribution by
UMI solely in the United States through direct response television infomercial
advertising. There are no minimum sales requirements imposed under the
agreement. The Company considers the product prices offered to UMI under the
agreement to be fair, reasonable and consistent with product prices which would
be offered to unaffiliated distributors. Sales by UMI of ChromaTrim chewing gum
under a prior distribution agreement with the Company accounted for 26.7% and
3.5% of the Company's total sales for the years ended December 31, 1995 and
1996, respectively. In December 1994, the Company loaned National Distributing
$100,000 bearing interest at 8% per annum. The loan was repaid with $3,000
interest in March 1995.
In January 1996, Earl K. Manhold III, a former director of the Company,
exercised options to purchase 60,000 shares of the Company's Common Stock at
$2.00 per share and sold such shares to John E. Epert, the Company's then
Chairman for the same price per share.
The Company has purchased, since 1994, an ingredient in its ChromaTrim gum
product from Interhealth Nutritionals, Inc., ("Interhealth"), a company in which
Mr. Ratcliff was formerly a member of the Board of Directors. The Company did
not pay a different price for the ingredient during the time Mr. Ratcliff was a
member of Interhealth's Board of Directors and the Company believes that the
price it has paid and currently pays for the ingredient is fair, reasonable and
consistent with prices charged by unaffiliated suppliers.
30
<PAGE>
In January 1996, the Company loaned Mr. Epert (a former officer and
director) $150,000 bearing interest at 8% per annum due January 29, 1998.
In August 1996, the Company loaned Mr. Kern $66,000 as a part of his
employment contract. See "Item 10."
In August 1996, Mr. Ratcliff granted Mr. Kern the option to purchase up to
50,000 shares of the Company's Common Stock held or purchasable by Mr. Ratcliff
for $6.00 per share at any time between February 1, 1998 and February 28, 1998
so long as Mr. Kern is employed by the Company at that time.
The Company believes that the terms of all agreements described above which
involve the Company's officers, directors, principal stockholders or affiliates
are fair, reasonable and consistent with terms that the Company could obtain
from unaffiliated third parties. All future agreements with officers, directors,
principal stockholders and affiliates will be approved by a majority of the
Company's disinterested directors.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
a. Exhibits:
Exhibit No. Title
----------- -----
1.01 Form of Underwriting Agreement(1)
1.02 Form of Selling Agreement(1)
1.03 Form of Representative's Warrants(1)
1.04 Amended Form of Underwriting Agreement(1)
1.05 Amended Form of Selling Agreement(1)
1.06 Form of Representative's Unit Warrant(1)
1.07 Form of Warrant Agreement(1)
2.01 Certificate of Incorporation and Amendments thereto of the
Registrant(1)
2.02 Bylaws of the Registrant(1)
31
<PAGE>
5.01 Opinion of Gary A. Agron, regarding legality of the Common
Stock (includes Consent)(1)
10.01 1995 Stock Option Plan(1)
10.02 Lease Agreement - Phoenix Executive Office Facility(1)
10.03 Employment Contract with Mr. Ratcliff(1)
10.04 Employment Contract with Mr. Manhold(1)
10.05 Employment Contract with Mr. Kehoe(1)
10.06 Employment Contract with Mr. Bouchy(1)
10.07 Form of Bridge Loan Agreement together with Exhibits thereto(1)
10.08 Lease Agreement - Phoenix, Arizona manufacturing facility(1)
10.09 Amendment to Stock Option Plan(1)
10.10 Lease with Textron Financial Corporation(1)
10.11 Memorandum of Understanding with Universal Merchants, Inc.
(U.S.A.)(1)
10.12 Memorandum of Understanding with Bernstein Bros. Marketing
Corporation(1)
10.13 Waiver Under Employment Agreement (Mr. Ratcliff)(1)
10.14 LaLanne License Agreement(1)
10.15 Manufacturing Agreement with Ford Machine Company, Inc.(1)
10.16 Employment Agreement with Mr. Bernstein(1)
10.17 Engagement Agreement (Mayday, Inc.)(1)
10.18 Employment Agreement with Mr. Epert(1)
10.19 Employment Agreement with Mr. Kern(2)
10.20 Revised Employment Agreement with Mr. Ratcliff(3)
32
<PAGE>
10.20(a) Form of Convertible Note Dated February 20, 1997(4)
10.21 Revised Employment Agreement with Mr. Epert (3)
10.21(a) Registration Rights Agreement (4)
10.22 Agreement with Active Media Services, Inc.
10.23 Employment Agreement with Mr. Goldstein
10.24 Employment Agreement with Mr. Kaplan
10.25 Employment Agreement with Mr. Bouchy
10.26 Termination of Mayday, Inc. Agreeemnt
23.01 Consent of Angell & Deering (1)
23.02 Consent of Gary A. Agron (See 5.01, above)(1)
23.03 Consent of Angell & Deering (1)
23.04 Consent of Angell & Deering (1)
23.05 Consent of Angell & Deering (1)
23.06 Consent of Gary A. Agron (3)
23.07 Consent of Angell & Deering (3)
- -----------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 declared effective by the Commission on April 24, 1996, file
number 333-870.
(2) Incorporated by reference to the Registrant's Form 8K dated August 26,
1996, file number 0-27646.
(3) Incorporated by reference to the Registrant's Registration Statement on
Form SB-2 declared effective by the Commission on November 8, 1996, file
number 333-14667.
(4) Incorporated by reference to the Registrant's Form 8K filed March 6, 1997.
33
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in Phoenix, Arizona, on March 25, 1997.
GUM TECH INTERNATIONAL, INC.
By: /s/ Gary S. Kehoe
-------------------------------------
Gary S. Kehoe
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Report has been signed below by the following persons on the dates
indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bruce Jorgenson Chairman of the Board of March 25, 1998
- ------------------------------------- Directors
Bruce Jorgenson
/s/ Gary S. Kehoe President and Chief March 25, 1998
- - ------------------------------------ Operating Officer and
Gary S. Kehoe Director
/s/ Jeffrey L. Bouchy Secretary, Treasurer, Chief March 25, 1998
- ------------------------------------- Financial Officer (Principal
Jeffrey L. Bouchy Accounting Officer)
/s/ Richard Ratcliff Director March 25, 1998
- -------------------------------------
Richard Ratcliff
/s/ William Yuan Director March 25, 1998
- -------------------------------------
William Yuan
/s/ William Boone Director March 25, 1998
- -------------------------------------
William Boone
/s/ W. Brown Russell Director March 25, 1998
- -------------------------------------
W. Brown Russell
</TABLE>
ACTIVE MEDIA SERVICES, INC.
AN INTERNATIONAL TRADING COMPANY
December 23, 1996
Gumtech International, Inc.
4205 North 7th Avenue - Suite 300
Phoenix, AZ 85013
Attention: Jerry Kern
Chief Executive Office; President
1. A. GUMTECH INTERNATIONAL, INC. ("GUMTECH") hereby sells and transfers
title to GUMTECH's merchandise as is more specifically set forth on Schedule A
attached hereto ("MERCHANDISE") to ACTIVE MEDIA SERVICES, INC. ("ACTIVE"'), and
shall ship such MERCHANDISE, F.O.B. destination, pursuant to ACTIVE's order(s).
GUMTECH agrees that the quality or the MERCHANDISE shall conform to the samples
provided to ACTIVE and that the quantity and component blend of the MERCHANDISE
shall not vary by more than five percent (5%) from those indicated on Schedule A
attached hereto, without the prior, written approval or ACTIVE. Such MERCHANDISE
shall be fully assembled, new, first-quality product, in unopened, factory
sealed containers and shall be subject to all warranties normally provided by
GUMTECH. Such MERCHANDISE shall have a shelf life of no less than twelve (12)
months at the time or delivery.
ONE BLUE HILL PLAZA
P.O. BOX 1705
PEARL RIVER, NEW YORK 10965-8705
PHONE: (914) 735-1700
<PAGE>
ACTIVE MEDIA SERVICES, INC.
AN INTERNATIONAL TRADING COMPANY
B. An original set or all shipping documents including, but not limited to
a signed bill(s) of lading, shall be forwarded to ACTIVE immediately upon
shipment. Despite the prior transfer title herein pursuant to this bill of sale,
risk of loss, as well as insurance, warehousing, handling and assembly costs
relating to the MERCHANDISE shall remain the responsibility of GUMTECH until the
MERCHANDISE is delivered pursuant to this Agreement.
C. GUMTECH represents and warrants that the shipped MERCHANDISE will be
merchantable, fit for human consumption and in compliance with the requirements
of the United States Food and Drug Administration, as well as any other federal,
state and local regulatory bodies that may have proper jurisdiction over the
distribution and sale of the MERCHANDISE. GUMTECH represents and warrants that
it has obtained all rights, licenses and permissions necessary for it to
manufacture, distribute and sell the MERCHANDISE subject to this Agreement, that
it has the right to enter into this Agreement and to sell the MERCHANDISE as it
is herein being sold and that the same are free and clear of any outstanding
liens or encumbrances. GUMTECH further represents and warrants that ACTIVE is
authorized to sell the MERCHANDISE pursuant to the remarketing restrictions set
forth in Paragraph 7 and Schedule C attached hereto and that such sale by ACTIVE
will not violate any applicable laws or the rights or licenses of other entities
or persons.
D. GUMTECH warrants and agrees to deliver to ACTIVE, within five (5)
business days from the signing of this Agreement by GUMTECH and ACTIVE, a
certificate of products liability insurance naming ACTIVE and/or its
subdistributors of the MERCHANDISE as additional insureds, at no cost or expense
to ACTIVE and/or its subdistributors.
- 2 -
<PAGE>
ACTIVE MEDIA SERVICES, INC.
AN INTERNATIONAL TRADING COMPANY
2. Active shall issue to GUMTECH in full payment for the MERCHANDISE, a
trade credit in an amount equal to THREE MILLION FIVE HUNDRED THOUSAND DOLLARS
($3,500,000) or such other amount as is equal to the Schedule A value of the
MERCHANDISE actually delivered pursuant to the terms of this Agreement. The
trade credit shall be utilized solely in accordance with the terms and
conditions of this Agreement in connection with the purchase by GUMTECH of
media, goods and/or services.
3. A. GUMTECH shall submit to ACTIVE a buying plan or plans, requesting the
acquisition of media, goods and/or services reasonably available to ACTIVE as a
trading company. In the case of broadcast and/or electronic media, GUMTECH shall
submit to ACTIVE a buying plan or plans no less than ninety (90) days prior to
the first date of the quarter that the media is anticipated to run. The buying
plan for broadcast and/or electronic media will emphasize frequency impact,
utilizing multiple dayparts with no specif daypart mix. In the case of print
media, GUMTECH shall submit to ACTIVE a buying plan or plans at least four (4)
weeks prior to the respective closing dates of the publications requested.
GUMTECH shall not require performance by ACTIVE later than December 31, 1999.
Upon acceptance by GUMTECH of the Cash Payment Requirement referred to in
paragraph 4, below, ACTIVE shall submit to GUMTECH, or its designee, the
- 3 -
<PAGE>
ACTIVE MEDIA SERVICES, INC.
AN INTERNATIONAL TRADING COMPANY
purchasing schedules developed by ACTIVE for approval prior to placement or
purchase. GUMTECH, or its designee shall promptly advise ACTIVE whether such
purchasing schedules are approved.
B. In the case of spot television, cost shall be average SQAD. In the case
of national cable media, costs shall be mutually agreed to by GUMTECH and
ACTIVE. In the case of print media, costs shall be the published open SRDS rate
card costs and all insertions shall be subject to each publisher's rules on
trade eligibility, which shall be at the discretion of such publisher. In the
case of travel-related services, including, without limitation TWA, which are
subject to restrictions and trade availability to ACTIVE, costs shall be the
prevailing rates available to ACTIVE for the dates requested at the time of
reservation. In the case of printing services, which are subject to trade
availability to ACTIVE, a benchmark for costs of such goods and/or services must
be established by GUMTECH in arms length negotiations with a vendor or supplier
and as agreed to by ACTIVE. Such costs must be verifiable by ACTIVE and GUMTECH
shall provide ACTIVE with invoices and/or proposals evidencing such costs.
C. Gross costs of media shall be reduced by an amount equal to fifteen
percent (15%) of such gross costs, representing an advertising agency commission
allowance to GUMTECH, and the resultant costs, shall be the basis of ACTIVE's
media performance, as well as ACTIVE's compensation, for such media hereunder.
ACTIVE shall have no other obligation to pay any agency commission, service or
brokers commissions, sales and use taxes, freight or delivery charges or any
other similar "add on" impositions.
- 4 -
<PAGE>
ACTIVE MEDIA SERVICES, INC.
AN INTERNATIONAL TRADING COMPANY
4. ACTIVE shall advise GUMTECH of the cash payment requirement, for the
purposes of paragraph 5 below ("Cash Payment Requirement") that ACTIVE will
require to effectuate such plan or plans. In the case of spot television media
and national cable media, the Cash Payment Requirement will be sixty percent
(60%) of ACTIVE's invoices. In the case of print media, the Cash Payment
Requirement will be fifty-nine percent (59%) of ACTIVE's invoices. In the case
of TWA, the Cash Payment Requirement shall be seventy percent (70%) of ACTIVE's
invoices. IN the case of printing services, the Cash Payment Requirement shall
be seventy-five percent (75%) of ACTIVE's invoices.
5. ACTIVE's invoices for the media, goods and/or services so provided by
ACTIVE shall be paid for in the following manner:
A. GUMTECH agrees to pay ACTIVE, pursuant to the credit terms mutually
agreed to by ACTIVE and GUMTECH and as set forth on Schedule B attached hereto,
the Cash Payment Requirement for such invoice(s) previously agreed to by GUMTECH
and ACTIVE relative to the buying plan or plans to which such media, goods
and/or services, relate.
B. The remaining balance of ACTIVE's invoice(s) shall be paid to
ACTIVE by application of the previously unapplied trade credit, if any, provided
to GUMTECH as a result of the delivery of the MERCHANDISE pursuant to this
Agreement, as well as by cash, within fifteen (15) days of the receipt of such
invoice(s) by GUMTECH to the extent of such invoice(s) for which there is no
unapplied trade credit then remaining. Any trade credit that remains unapplied
pursuant to this Agreement on the close of business on February 28, 2000 shall
expire at that time.
6. In the case of media, proof of performance will accompany ACTIVE's
reconciled invoice(s) when they are submitted to GUMTECH for payment. In the
event that GUMTECH shall determine to utilize the services of an agent in
- 5 -
<PAGE>
ACTIVE MEDIA SERVICES, INC.
AN INTERNATIONAL TRADING COMPANY
connection with the payment of ACTIVE's invoice(s), then GUMTECH shall be solely
responsible for the performance of such agent and shall remain liable to ACTIVE
pursuant to the terms of this Agreement until such agent has fully performed
GUMTECH's payment obligations hereunder.
7. ACTIVE agrees to abide by the limitation on the remarketing of the
MERCHANDISE as is set forth on Schedule C attached hereto.
8. A. ACTIVE, on the one hand, and GUMTECH on the other, (each an
"Indemnitor") each indemnifies and agrees to hold harmless the other, its
successors, assigns, shareholders, officers, directors, agents, representatives,
employees and/or subdistributors of the MERCHANDISE and/or each of them
(collectively referred to herein as the "Indemnified Party") from and against
any and all claims, liabilities, costs, expenses, suits, losses, damages,
recoveries (including, without limitation, reasonable attorney's fees and
disbursements), including interest, incurred by the Indemnified Party in any
action or proceeding between Indemnitor and the Indemnified Party or between the
Indemnified Party and any third party or otherwise, arising out of any breach or
alleged breach of any warranty, representation, agreement or inducement herein
made by the Indemnitor. The indemnification obligations contained herein shall
survive the expiration or termination of this Agreement.
B. This Agreement will not be effective to bind ACTIVE until and
unless executed and delivered by ACTIVE. Subject to the foregoing sentence, this
Agreement shall be binding upon the successors of both GUMTECH and ACTIVE.
- 6 -
<PAGE>
ACTIVE MEDIA SERVICES, INC.
AN INTERNATIONAL TRADING COMPANY
C. The undersigned hereby warrant that they have the express and
unqualified authority to bind their respective companies to this Agreement.
D. This Agreement contains the entire understanding between the
parties and may not be modified except by a writing signed by both nor may it be
assigned by either party hereto without the prior written consent of the other
party hereto. Any assignment made in violation of this Agreement shall be void.
ACTIVE retains the right to modify credit terms contained herein based on its
standard credit review procedures and to request and review credit histories and
reports of GUMTECH from time to time. No waiver of any provisions of this
Agreement shall be deemed or shall constitute a continuing waiver of such
provisions or a waiver of any other provision, unless otherwise expressly
provided for in a writing signed by both parties. The representations and
warranties of GUMTECH made herein with respect to the MERCHANDISE shall survive
the sale of the MERCHANDISE to ACTIVE hereunder.
[handwritten--and/or Ariz.--AE
GNK]
9. This Agreement shall be governed by the laws of the State of New York,
without reference to principles of choice of laws.
[handwritten--AE--GNK--They must accept delivery of 1st shipment of
$752,638 NLT 12-31- 96. See MERCHANDISE described in Schedule D.
Notwithstanding the foregoing, GUMTECH shall be responsible and shall
pay for all costs of insurance for the MERCHANDISE until delivery to
the buyer.
GNK--AE--Agreement is null & void if not
countersigned & returned NLT 12-26-96.]
- 7 -
<PAGE>
ACTIVE MEDIA SERVICES, INC.
AN INTERNATIONAL TRADING COMPANY
If the foregoing accurately sets forth your understanding of our Agreement,
please sign, date and return the enclosed copy of this Agreement.
Very truly yours,
ACTIVE MEDIA SERVICES, INC.
By: /s/ Alan S. Elkin
-------------------------
Alan S. Elkin
Chief Executive Officer
Accepted and Agreed to:
GUMTECH INTERNATIONAL, INC.
By: /s/ Gerald N. Kern 12-23-96
------------------------ ----------------
Date
Gerald N. Kern Pres.
------------------------- -----------------
Print Name Title
- 8 -
EMPLOYMENT AGREEMENT
EFFECTIVE DATE: September 1, 1996
EMPLOYER: GUMTECH INTERNATIONAL, INC.
a Utah corporation
EMPLOYEE: LESTER GOLDSTEIN, PH.D.
PURPOSE:
- --------
Employer is in the business of manufacturing, marketing and selling value
added gum products to wholesalers and distributors and in the retail and private
label markets (collectively, the "Business"). Employer desires to employ
Employee as a Vice President of Operations and Employee desires to accept such
employment, on the terms, covenants and conditions set forth in this Employment
Agreement (this "Agreement").
AGREEMENTS:
- -----------
For the reasons set forth above, and in consideration of the mutual
promises and agreements set forth in this Agreement, Employer and Employee agree
as follows:
1. Employment; Duties.
--------------------
1.1 Subject to and in accordance with this Agreement, Employer employs
Employee as the Vice President of Operations of Employer and Employee accepts
employment with Employer subject to the general supervision and pursuant to the
orders, advice and direction of Employer. In such capacity, Employee shall be
responsible for evaluating operations and assisting the President in the
implementation of changes necessary to achieve cost efficient, optimal
operations.
1.2 Employee shall use his best efforts and devote his frill time to
the performance of all the duties that may be required of and from him pursuant
to the express and implicit terms of this Agreement. Such duties shall be
rendered in Phoenix, Arizona; and at such other places as Employer and Employee
shall mutually agree upon.
1.3 Employee represents and warrants that there are no agreements or
arrangements, written or oral, in effect which would prevent Employee from
rendering services to Employer during the term of this Agreement.
1.4 Nothing herein contained shall be construed to create a
partnership or joint venture between Employer and Employee. Neither party hereto
shall be liable for the debts or obligations of the other unless expressly
assumed in writing and signed by the parties hereto.
<PAGE>
2. Term. This Agreement shall become effective on the date first written
above and, unless terminated sooner pursuant to Section 5, continue through
December 31, 1997 (the "Initial Term"). Employer shall have the right and
option, but not the obligation, to extend the Initial Term through December 31,
1998 (the "Extension Term"), subject to the termination provisions of Section 5
below and the other terms and provisions of this Agreement, by giving Employee
written notice of the extension to Employee on or before November 1, 1997.
3. Compensation and Other Benefits.
3.1 Compensation. For services rendered to Employer hereunder, in
whatever capacity rendered, Employee shall have and receive, subject to
withholding and other applicable taxes, a salary during the Initial Term of
$10,000 per month and a salary during the Extension Term shall be $12,085. The
base salary will be payable monthly, in arrears in two equal monthly
installments.
3.2 Incentive Bonus. During the Initial Term, an annual incentive
bonus for the calendar year 1996 and, during the Extension Term, an annual
incentive bonus for the calendar year 1997, equal to 1% of the "Income After
Provision For Income Taxes" for each such calendar year, as determined by
Employer's independent public accountant. The annual incentive bonus shall be
calculated on an annualized basis and 80% of the bonus is paid quarterly (within
15 days after the end of each calendar quarter) with any holdback to be paid
within 45 days following the end of the calendar year. In the event that the
bonus paid to Employee exceeds that which was payable to Employee, Employee
agrees to reimburse Employer for such excess within 10 business days following
Employer's demand for the same. In the event that this Agreement is terminated
at any time other than the end of a calendar year, quarterly payments will cease
and any bonus will payable within 45 days following the end of the calendar
year, which bonus will be prorated based upon a fraction, the numerator of which
is the number of days this Agreement was in effect during the subject calendar
year and the numerator of which is 360.
3.3 Business Expenses. Upon submission of proper documentation,
Employer shall pay or reimburse Employee for all reasonable and necessary
office, telephone, travel and other expenses incurred by him in the pursuit of
his duties on behalf of Employer.
3.4 Employee Benefits. Employee shall be entitled to participate in
any other bonus, stock option, incentive compensation, deferred compensation,
group medical and dental insurance plans or other plans or programs and to
receive any other benefits for which he is eligible and which Employer may
provide its employees generally or its officers specifically.
3.5 Automobile Allowance. Employer shall pay to Employee, on a monthly
basis, an automobile allowance of $500 per month.
4. Facilities. Employer shall provide and maintain (or cause to be provided
and maintained) such facilities, equipment, offices, secretarial help, and other
-2-
<PAGE>
services and supplies as it deems necessary for Employee's performance of his
duties under this Agreement, as established from time to time by Employer.
5. Termination.
5.1 This Agreement and Employee's employment hereunder may be
terminated at any time:
(a) By either party upon thirty days prior written notice to the other
party.
(b) By Employee upon the material breach by Employer of any of the
material provisions of this Agreement.
(c) By Employer for Cause. For purposes of this Agreement, the term
"Cause" shall mean: (i) conduct on the part of Employee which is intended to
result directly or indirectly in substantial gain or personal enrichment at the
expense of Employer; (ii) the material breach by Employee of any of the
provisions of this Agreement; or (iii) the failure by Employee to substantially
perform his duties hereunder.
Further, this Agreement and Employee's employment hereunder shall automatically
terminate upon the death, disability or insanity of Employee or the bankruptcy
of Employer or the discontinuance of Employer's Business.
5.2 Notwithstanding the termination of this Agreement or of Employee's
employment hereunder, the parties hereto shall be required to carry out any
provision hereof which contemplate performance by them subsequent to such
termination, nor shall such termination affect any liability or obligation which
has accrued prior to such termination, including but not limited to, accrued but
unpaid compensation and any liability for loss or damage on account of default.
5.3 Following any termination of employment hereunder, or notice
thereof; Employee shall frilly cooperate with Employer in all matters relating
to the winding up of his pending work on behalf of Employer and the orderly
transfer of any such pending work to other employees of Employer as may be
designated by Employer. In consideration thereof; Employer shall pay Employee
for any services rendered post-termination at a rate equivalent to the hourly
rate payable to Employee during the Initial Term or the Extension Term, as
applicable, during which the termination occurred.
5.4 Upon termination of this Agreement, or whenever requested by
Employer, Employee shall immediately turn over to Employer all of Employer's
property, including all items used by Employee in rendering services hereunder,
that may be in Employee's possession or under his control.
-3-
<PAGE>
6. Covenant Not to Compete; Disclosure of Information.
6.1 Solicitation.
6.1.1 For a period of six months after the date of termination of
this Agreement, Employee shall not, whether alone or as a partner, officer,
director, employee or shareholder (or other holder of an equity interest) of; or
consultant, advisor or lender to, any other corporation, partnership or other
entity, or as a trustee, fiduciary or other representative, solicit Employer's
customers with respect to, engage in or have any interest, including as a
creditor, in any person, partnership, corporation, association, or other
business entity, whether as employee, officer, director, agent, consultant,
stockholder or holder of any right to any form of equity ownership, or
otherwise, that engages in the Business.
6.1.2 Employee shall not, during or for a period of six (6)
months after the term of this Agreement, solicit any employee, sales
representative or independent contractor of Employer for employment by any
person, firm, partnership, corporation, association or other entity for any
reason or purpose allied or related to the Business whatsoever.
6.2 Non Disclosure.
6.2.1 Employee hereby recognizes and acknowledges that: (i)
Employee will be making use of; acquiring, and/or adding to proprietary
information of a special and unique nature and value relating to and including,
but not limited to, such matters Employer's trade secrets, systems, procedures,
manuals, confidential reports, lists of suppliers, research and development,
projects, policies, processes, formulas, techniques, know-how and facts relating
to sales, advertising, mailing, promotions, financial matters, customers,
customer lists, purchases or requirements or other methods used and preferred by
Employer in its operations, (ii) the Company will disclose certain proprietary
information to Obligor including, but not limited to, the details of any
statistical or financial data, the operations and structure of the business of
Employer, and manuals, forms, techniques, methods or procedures of Employer used
by or made available to Employee in the course of Employee's employment (the
information referenced to in paragraphs 6.2.1(i) and (ii) above are hereinafter
collectively referred to as the "Proprietary Information").
6.2.2 Employee hereby recognizes and acknowledges that the
Proprietary Information is a valuable, special and unique asset of Employer's
business.
6.2.3 Employee will not at any time, directly or indirectly make
use of, divulge or disclose any of the Proprietary Information or any part
thereof for any purpose whatsoever to any person, firm, corporation, association
or other entity for any reason or purpose whatsoever that has been obtained by,
or disclosed to, him as a result of his relationship with Employer. Immediately
upon request by Employer, Employee shall return to Employer any and all
materials relating to Proprietary Information.
-4-
<PAGE>
6.3 Acknowledgment.
6.3.1 Employee acknowledges that the covenants contained in this
Section 6 are a material inducement for Employer to enter into this Agreement
and to perform its obligations hereunder and that the services Employee is to
render to Employer hereunder are of a special and unusual character with a
unique value to Employer. Employee acknowledges that it would take at least six
(6) months for Employer to retain and train personnel to replace Employee.
Accordingly, Employee acknowledges that the restrictions contained in this
Section 6 are reasonably necessary for the protection of Employer's business and
that a breach of any such restrictions could not adequately be compensated by
damages in an action at law.
6.3.2 In the event of a breach or threatened breach by Employee
of any provision contained in this Section 6, Employer shall be entitled to
obtain, by posting an appropriate bond, an injunction (preliminary or permanent,
or a temporary restraining order) restraining Employee from the activity or
threatened activity constituting or that would constitute a breach.
6.3.3 In the event of a breach by Employee of any provision
contained under this Section 6, Employer shall be entitled to an accounting and
repayment of all profits, compensation, commissions, remunerations or other
benefits that Employee, directly or indirectly, has realized and/or may realize
as a result of, arising out of or in connection of any such breach.
6.3.4 The remedies provided in this Section 6 shall be in
addition to, and not in lieu of; any and all other remedies of Employer at law
or in equity.
7. Miscellaneous.
7.1 Notice. Notices required or permitted to be given hereunder shall
be sufficient if in writing and delivered or deposited in the mail, postage
prepaid, certified mail, return receipt requested (or the equivalent in a
foreign country), addressed, if to Employer, at its principal place of business
and, if to Employee, at the address set forth in Employer's employee records or
to such other address as may be designated in writing hereafter by either party
hereto. All notices hereunder shall be effective: (a) five (5) days after
deposit in the mail; or (b) upon delivery, if delivered in person or by
commercial express service.
7.2 Burden. Except as otherwise provided herein, this Agreement shall
be binding upon and inure to the benefit of any successor of Employer and any
such successor shall be deemed substituted for Employer under the terms of this
Agreement. As used in this Agreement, the term successor" shall mean any person,
firm, corporation or other business entity which at any time, whether by merger,
purchase or otherwise acquires all or substantially all of the assets or
business of Employer.
-5-
<PAGE>
7.3 Entire Agreement. This Agreement contains the entire agreement and
understanding by and between Employer arid Employee with respect to the
employment of Employee and no representations, promises, agreements or
understandings, written or oral, not contained herein shall be of any force or
effect. No change or modification of this Agreement shall be valid or binding
unless it is in writing and signed by the parties intended to be bound. No
waiver of any provision of this Agreement shall be valid unless it is in writing
and signed by the parties against whom the waiver is sought to be enforced. No
valid waiver of any provision of this Agreement at any time shall be deemed a
waiver of any other provision of this Agreement at such time or any other time.
7.4 Arbitration. In the event any dispute or controversy arising out
of this Agreement cannot be settled by Employer and Employee, such controversy
or dispute, at the election of either Employer or Employee, by written notice to
the other, may be submitted to arbitration in Phoenix, Arizona, and for this
purpose Employer and Employee each hereby expressly consent to such arbitration
and such place. In the event Employer and Employee cannot, within 15 days
following the election to submit the dispute or controversy to arbitration,
mutually agree upon an arbitrator to settle their dispute or controversy, then
Employer and Employee shall each select one arbitrator and the two arbitrators
shall select a third arbitrator. The decision of the majority of said
arbitrators shall be binding upon Employer and Employee for all purposes, and
judgment to enforce any such binding decision may be entered in the Superior
Court, Maricopa County, Arizona (and for this purpose Employer and Employee
hereby irrevocably consent to the jurisdiction of said court). If either
Employer or Employee fails to select an arbitrator within fifteen (15) days
after written demand from the other party to do so, then the Chief Judge in the
United States District Court of the District of Arizona shall select such other
arbitrator. At the election of either Employer or Employee, all arbitrators
shall be selected pursuant to the then existing rules and regulations of the
American Arbitration Association governing commercial transactions. At the
request of either Employer or Employee, arbitration proceedings shall be
conducted in the utmost secrecy. In such case, all documents, testimony and
records shall be available for inspection only for purposes of the arbitration
and only by either party and their respective attorneys and experts who shall
agree, in advance and in writing, to receive all such information in secrecy. In
all other respects, the arbitrators shall conduct all proceedings pursuant to
the Uniform Arbitration Act as adopted by the State of Arizona and the then
existing rules and regulations of the American Arbitration Association governing
commercial transactions. The costs of the arbitration and the arbitrators shall
be borne by the non-prevailing party, as determined by the arbitrators, and each
party shall bear their own attorneys' fees.
7.5 Prohibition Against Assignment. This Agreement is personal to
Employee and Employee shall not assign or delegate any of his rights or
obligations hereunder without first obtaining the written consent of Employer.
7.6 Governing Law. This Agreement shall be governed in all respects
whether as to validity, construction, capacity, performance or otherwise by the
laws of the State of Arizona. The section headings used in this Agreement are
included solely for convenience and shall not affect or be used in connection
with the interpretation of this Agreement.
-6-
<PAGE>
7.7 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any one or more of the
provisions of this Agreement shall not affect the validity and enforceability of
the other provisions.
IN WITNESS WHEREOF, the parties have executed this document to be effective
the date first above written.
EMPLOYEE: EMPLOYER:
GUM TECH INTERNATIONAL, INC.,
A Utah corporation
/s/ Lester Goldstein By: /s/ Gerald Kern
- - -------------------------------------- --------------------------
LESTER GOLDSTEIN, PH.D. Gerald Kern, President
-7-
EMPLOYMENT AGREEMENT
EFFECTIVE DATE: January 1, 1997
EMPLOYER: GUMTECH INTERNATIONAL, INC.
a Utah corporation
EMPLOYEE: ROY KAPLAN
PURPOSE:
- --------
Employer is in the business of manufacturing, marketing and selling value
added gum products to wholesalers and distributors and in the retail and private
label markets (collectively, the "Business"). Employer desires to employ
Employee as a Vice President of Sales and Employee desires to accept such
employment, on the terms, covenants and conditions set forth in this Employment
Agreement (this "Agreement").
AGREEMENTS:
- -----------
For the reasons set forth above, and in consideration of the mutual
promises and agreements set forth in this Agreement, Employer and Employee agree
as follows:
1. Employment; Duties.
--------------------
1.1 Subject to and in accordance with this Agreement, Employer employs
Employee as the Vice President of Sales of Employer and Employee accepts
employment with Employer subject to the general supervision and pursuant to the
orders, advice and direction of Employer. In such capacity, Employee shall be
responsible for product sales.
1.2 Employee shall use his best efforts and devote his frill time to
the performance of all the duties that may be required of and from him pursuant
to the express and implicit terms of this Agreement. Such duties shall be
rendered in Phoenix, Arizona; and at such other places as Employer and Employee
shall mutually agree upon.
1.3 Employee represents and warrants that there are no agreements or
arrangements, written or oral, in effect which would prevent Employee from
rendering services to Employer during the term of this Agreement.
1.4 Nothing herein contained shall be construed to create a
partnership or joint venture between Employer and Employee. Neither party hereto
shall be liable for the debts or obligations of the other unless expressly
assumed in writing and signed by the parties hereto.
2. Term. This Agreement shall become effective on the date first written
above and, unless terminated sooner pursuant to Section 5, continue through
-1-
<PAGE>
December 31, 1997 (the "Initial Term"). Employer shall have the right and
option, but not the obligation, to extend the Initial Term through December 31,
1998 (the "Extension Term"), subject to the termination provisions of Section 5
below and the other terms and provisions of this Agreement, by giving Employee
written notice of the extension to Employee on or before November 1, 1997.
3. Compensation and Other Benefits.
--------------------------------
3.1 Compensation. For services rendered to Employer hereunder, in
whatever capacity rendered, Employee shall have and receive, subject to
withholding and other applicable taxes, a salary during the Initial Term of
$10,000 per month and a salary during the Extension Term shall be $12,085. The
base salary will be payable monthly, in arrears in two equal monthly
installments.
3.2 Incentive Bonus. During the Initial Term, an annual incentive
bonus for the calendar year 1996 and, during the Extension Term, an annual
incentive bonus for the calendar year 1997, equal to 1% of the "Income After
Provision For Income Taxes" for each such calendar year, as determined by
Employer's independent public accountant. The annual incentive bonus shall be
calculated on an annualized basis and 80% of the bonus is paid quarterly (within
15 days after the end of each calendar quarter) with any holdback to be paid
within 45 days following the end of the calendar year. In the event that the
bonus paid to Employee exceeds that which was payable to Employee, Employee
agrees to reimburse Employer for such excess within 10 business days following
Employer's demand for the same. In the event that this Agreement is terminated
at any time other than the end of a calendar year, quarterly payments will cease
and any bonus will payable within 45 days following the end of the calendar
year, which bonus will be prorated based upon a fraction, the numerator of which
is the number of days this Agreement was in effect during the subject calendar
year and the numerator of which is 360.
3.3 Business Expenses. Upon submission of proper documentation,
Employer shall pay or reimburse Employee for all reasonable and necessary
office, telephone, travel and other expenses incurred by him in the pursuit of
his duties on behalf of Employer.
3.4 Employee Benefits. Employee shall be entitled to participate in
any other bonus, stock option, incentive compensation, deferred compensation,
group medical and dental insurance plans or other plans or programs and to
receive any other benefits for which he is eligible and which Employer may
provide its employees generally or its officers specifically.
3.5 Automobile Allowance. Employer shall pay to Employee, on a monthly
basis, an automobile allowance of $500 per month.
4. Facilities. Employer shall provide and maintain (or cause to be provided
and maintained) such facilities, equipment, offices, secretarial help, and other
services and supplies as it deems necessary for Employee's performance of his
duties under this Agreement, as established from time to time by Employer.
-2-
<PAGE>
5. Termination.
------------
5.1 This Agreement and Employee's employment hereunder may be
terminated at any time:
(a) By either party upon thirty days prior written notice to the other
party.
(b) By Employee upon the material breach by Employer of any of the
material provisions of this Agreement.
(c) By Employer for Cause. For purposes of this Agreement, the term
"Cause" shall mean: (i) conduct on the part of Employee which is intended to
result directly or indirectly in substantial gain or personal enrichment at the
expense of Employer; (ii) the material breach by Employee of any of the
provisions of this Agreement; or (iii) the failure by Employee to substantially
perform his duties hereunder.
Further, this Agreement and Employee's employment hereunder shall automatically
terminate upon the death, disability or insanity of Employee or the bankruptcy
of Employer or the discontinuance of Employer's Business.
5.2 Notwithstanding the termination of this Agreement or of Employee's
employment hereunder, the parties hereto shall be required to carry out any
provision hereof which contemplate performance by them subsequent to such
termination, nor shall such termination affect any liability or obligation which
has accrued prior to such termination, including but not limited to, accrued but
unpaid compensation and any liability for loss or damage on account of default.
5.3 Following any termination of employment hereunder, or notice
thereof; Employee shall frilly cooperate with Employer in all matters relating
to the winding up of his pending work on behalf of Employer and the orderly
transfer of any such pending work to other employees of Employer as may be
designated by Employer. In consideration thereof; Employer shall pay Employee
for any services rendered post-termination at a rate equivalent to the hourly
rate payable to Employee during the Initial Term or the Extension Term, as
applicable, during which the termination occurred.
5.4 Upon termination of this Agreement, or whenever requested by
Employer, Employee shall immediately turn over to Employer all of Employer's
property, including all items used by Employee in rendering services hereunder,
that may be in Employee's possession or under his control.
-3-
<PAGE>
6. Covenant Not to Compete; Disclosure of Information.
---------------------------------------------------
6.1 Solicitation.
6.1.1 For a period of six months after the date of termination of
this Agreement, Employee shall not, whether alone or as a partner, officer,
director, employee or shareholder (or other holder of an equity interest) of; or
consultant, advisor or lender to, any other corporation, partnership or other
entity, or as a trustee, fiduciary or other representative, solicit Employer's
customers with respect to, engage in or have any interest, including as a
creditor, in any person, partnership, corporation, association, or other
business entity, whether as employee, officer, director, agent, consultant,
stockholder or holder of any right to any form of equity ownership, or
otherwise, that engages in the Business.
6.1.2 Employee shall not, during or for a period of six (6)
months after the term of this Agreement, solicit any employee, sales
representative or independent contractor of Employer for employment by any
person, firm, partnership, corporation, association or other entity for any
reason or purpose allied or related to the Business whatsoever.
6.2 Non Disclosure.
6.2.1 Employee hereby recognizes and acknowledges that: (i)
Employee will be making use of; acquiring, and/or adding to proprietary
information of a special and unique nature and value relating to and including,
but not limited to, such matters Employer's trade secrets, Systems, procedures,
manuals, confidential reports, lists of suppliers, research and development,
projects, policies, processes, formulas, techniques, know-how and facts relating
to sales, advertising, mailing, promotions, financial matters, customers,
customer lists, purchases or requirements or other methods used and preferred by
Employer in its operations, (ii) the Company will disclose certain proprietary
information to Obligor including, but not limited to, the details of any
statistical or financial data, the operations and structure of the business of
Employer, and manuals, forms, techniques, methods or procedures of Employer used
by or made available to Employee in the course of Employee's employment (the
information referenced to in paragraphs 6.2.1(i) and (ii) above are hereinafter
collectively referred to as the "Proprietary Information").
6.2.2 Employee hereby recognizes and acknowledges that the
Proprietary Information is a valuable, special and unique asset of Employer's
business.
6.2.3 Employee will not at any time, directly or indirectly make
use of, divulge or disclose any of the Proprietary Information or any part
thereof for any purpose whatsoever to any person, firm, corporation, association
or other entity for any reason or purpose whatsoever that has been obtained by,
or disclosed to, him as a result of his relationship with Employer. Immediately
upon request by Employer, Employee shall return to Employer any and all
materials relating to Proprietary Information.
-4-
<PAGE>
6.3 Acknowledgment.
---------------
6.3.1 Employee acknowledges that the covenants contained in this
Section 6 are a material inducement for Employer to enter into this Agreement
and to perform its obligations hereunder and that the services Employee is to
render to Employer hereunder are of a special and unusual character with a
unique value to Employer. Employee acknowledges that it would take at least six
(6) months for Employer to retain and train personnel to replace Employee.
Accordingly, Employee acknowledges that the restrictions contained in this
Section 6 are reasonably necessary for the protection of Employer's business and
that a breach of any such restrictions could not adequately be compensated by
damages in an action at law.
6.3.2 In the event of a breach or threatened breach by Employee
of any provision contained in this Section 6, Employer shall be entitled to
obtain, by posting an appropriate bond, an injunction (preliminary or permanent,
or a temporary restraining order) restraining Employee from the activity or
threatened activity constituting or that would constitute a breach.
6.3.3 In the event of a breach by Employee of any provision
contained under this Section 6, Employer shall be entitled to an accounting and
repayment of all profits, compensation, commissions, remunerations or other
benefits that Employee, directly or indirectly, has realized and/or may realize
as a result of, arising out of or in connection of any such breach.
6.3.4 The remedies provided in this Section 6 shall be in
addition to, and not in lieu of; any and all other remedies of Employer at law
or in equity.
7. Miscellaneous.
--------------
7.1 Notice. Notices required or permitted to be given hereunder shall
be sufficient if in writing and delivered or deposited in the mail, postage
prepaid, certified mail, return receipt requested (or the equivalent in a
foreign country), addressed, if to Employer, at its principal place of business
and, if to Employee, at the address set forth in Employer's employee records or
to such other address as may be designated in writing hereafter by either party
hereto. All notices hereunder shall be effective: (a) five (5) days after
deposit in the mail; or (b) upon delivery, if delivered in person or by
commercial express service.
7.2 Burden. Except as otherwise provided herein, this Agreement shall
be binding upon and inure to the benefit of any successor of Employer and any
such successor shall be deemed substituted for Employer under the terms of this
Agreement. As used in this Agreement, the term successor" shall mean any person,
firm, corporation or other business entity which at any time, whether by merger,
purchase or otherwise acquires all or substantially all of the assets or
business of Employer.
7.3 Entire Agreement. This Agreement contains the entire agreement and
understanding by and between Employer arid Employee with respect to the
employment of Employee and no representations, promises, agreements or
understandings, written or oral, not contained herein shall be of any force or
-5-
<PAGE>
effect. No change or modification of this Agreement shall be valid or binding
unless it is in writing and signed by the parties intended to be bound. No
waiver of any provision of this Agreement shall be valid unless it is in writing
and signed by the parties against whom the waiver is sought to be enforced. No
valid waiver of any provision of this Agreement at any time shall be deemed a
waiver of any other provision of this Agreement at such time or any other time.
7.4 Arbitration. In the event any dispute or controversy arising out
of this Agreement cannot be settled by Employer and Employee, such controversy
or dispute, at the election of either Employer or Employee, by written notice to
the other, may be submitted to arbitration in Phoenix, Arizona, and for this
purpose Employer and Employee each hereby expressly consent to such arbitration
and such place. In the event Employer and Employee cannot, within 15 days
following the election to submit the dispute or controversy to arbitration,
mutually agree upon an arbitrator to settle their dispute or controversy, then
Employer and Employee shall each select one arbitrator and the two arbitrators
shall select a third arbitrator. The decision of the majority of said
arbitrators shall be binding upon Employer and Employee for all purposes, and
judgment to enforce any such binding decision may be entered in the Superior
Court, Maricopa County, Arizona (and for this purpose Employer and Employee
hereby irrevocably consent to the jurisdiction of said court). If either
Employer or Employee fails to select an arbitrator within fifteen (15) days
after written demand from the other party to do so, then the Chief Judge in the
United States District Court of the District of Arizona shall select such other
arbitrator. At the election of either Employer or Employee, all arbitrators
shall be selected pursuant to the then existing rules and regulations of the
American Arbitration Association governing commercial transactions. At the
request of either Employer or Employee, arbitration proceedings shall be
conducted in the utmost secrecy. In such case, all documents, testimony and
records shall be available for inspection only for purposes of the arbitration
and only by either party and their respective attorneys and experts who shall
agree, in advance and in writing, to receive all such information in secrecy. In
all other respects, the arbitrators shall conduct all proceedings pursuant to
the Uniform Arbitration Act as adopted by the State of Arizona and the then
existing rules and regulations of the American Arbitration Association governing
commercial transactions. The costs of the arbitration and the arbitrators shall
be borne by the non-prevailing party, as determined by the arbitrators, and each
party shall bear their own attorneys' fees.
7.5 Prohibition Against Assignment. This Agreement is personal to
Employee and Employee shall not assign or delegate any of his rights or
obligations hereunder without first obtaining the written consent of Employer.
7.6 Governing Law. This Agreement shall be governed in all respects
whether as to validity, construction, capacity, performance or otherwise by the
laws of the State of Arizona. The section headings used in this Agreement are
included solely for convenience and shall not affect or be used in connection
with the interpretation of this Agreement.
-6-
<PAGE>
7.7 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any one or more of the
provisions of this Agreement shall not affect the validity and enforceability of
the other provisions.
IN WITNESS WHEREOF, the parties have executed this document to be effective
the date first above written.
EMPLOYEE: EMPLOYER:
GUM TECH INTERNATIONAL, INC.
a Utah corporation
/s/ Roy Kaplan By: /s/ Gerald Kern
- - -------------------------- ----------------------------
ROY KAPLAN Gerald Kern, President
-7-
EMPLOYMENT AGREEMENT
EFFECTIVE DATE: January 1, 1997
EMPLOYER: GUMTECH INTERNATIONAL, INC.
a Utah corporation
EMPLOYEE: JEFFREY L. BOUCHY
PURPOSE:
- --------
Employer is in the business of manufacturing, marketing and selling value
added gum products to wholesalers and distributors and in the retail and private
label markets (collectively, the "Business"). Employer desires to employ
Employee as Chief Financial Officer and Employee desires to accept such
employment, on the terms, covenants and conditions set forth in this Employment
Agreement (this "Agreement").
AGREEMENTS:
- -----------
For the reasons set forth above, and in consideration of the mutual
promises and agreements set forth in this Agreement, Employer and Employee agree
as follows:
1. Employment; Duties.
--------------------
1.1 Subject to and in accordance with this Agreement, Employer employs
Employee as Chief Financial Officer of Employer and Employee accepts employment
with Employer subject to the general supervision and pursuant to the orders,
advice and direction of Employer. In such capacity, Employee shall be
responsible for financial affairs of Employer.
1.2 Employee shall use his best efforts and devote his frill time to
the performance of all the duties that may be required of and from him pursuant
to the express and implicit terms of this Agreement. Such duties shall be
rendered in Phoenix, Arizona; and at such other places as Employer and Employee
shall mutually agree upon.
1.3 Employee represents and warrants that there are no agreements or
arrangements, written or oral, in effect which would prevent Employee from
rendering services to Employer during the term of this Agreement.
1.4 Nothing herein contained shall be construed to create a
partnership or joint venture between Employer and Employee. Neither party hereto
shall be liable for the debts or obligations of the other unless expressly
assumed in writing and signed by the parties hereto.
<PAGE>
2. Term. This Agreement shall become effective on the date first written
above and, unless terminated sooner pursuant to Section 5, continue through
December 31, 2000 (the "Term").
3. Compensation and Other Benefits.
--------------------------------
3.1 Compensation. For services rendered to Employer hereunder, in
whatever capacity rendered, Employee shall have and receive, subject to
withholding and other applicable taxes, a salary of $6,000 per month.
3.2 Incentive Bonus. During the Term, an annual incentive bonus equal
to 1% of the "Income After Provision For Income Taxes" for each such calendar
year during the term, as determined by Employer's independent public accountant.
The annual incentive bonus shall be calculated on an annualized basis and 80% of
the bonus is paid quarterly (within 15 days after the end of each calendar
quarter) with any holdback to be paid within 45 days following the end of the
calendar year. In the event that the bonus paid to Employee exceeds that which
was payable to Employee, Employee agrees to reimburse Employer for such excess
within 10 business days following Employer's demand for the same. In the event
that this Agreement is terminated at any time other than the end of a calendar
year, quarterly payments will cease and any bonus will payable within 45 days
following the end of the calendar year, which bonus will be prorated based upon
a fraction, the numerator of which is the number of days this Agreement was in
effect during the subject calendar year and the numerator of which is 360.
3.3 Business Expenses. Upon submission of proper documentation,
Employer shall pay or reimburse Employee for all reasonable and necessary
office, telephone, travel and other expenses incurred by him in the pursuit of
his duties on behalf of Employer.
3.4 Employee Benefits. Employee shall be entitled to participate in
any other bonus, stock option, incentive compensation, deferred compensation,
group medical and dental insurance plans or other plans or programs and to
receive any other benefits for which he is eligible and which Employer may
provide its employees generally or its officers specifically.
3.5 Automobile Allowance. Employer shall pay to Employee, on a monthly
basis, an automobile allowance of $500 per month.
4. Facilities. Employer shall provide and maintain (or cause to be provided
and maintained) such facilities, equipment, offices, secretarial help, and other
services and supplies as it deems necessary for Employee's performance of his
duties under this Agreement, as established from time to time by Employer.
-2-
<PAGE>
5. Termination.
------------
5.1 This Agreement and Employee's employment hereunder may be
terminated at any time:
(a) Upon mutual agreement in writing.
(b) By Employee upon the material breach by Employer of any of the
material provisions of this Agreement.
(c) By Employer for Cause. For purposes of this Agreement, the term
"Cause" shall mean: (i) conduct on the part of Employee which is intended to
result directly or indirectly in substantial gain or personal enrichment at the
expense of Employer; (ii) the material breach by Employee of any of the
provisions of this Agreement; or (iii) the failure by Employee to substantially
perform his duties hereunder.
Further, this Agreement and Employee's employment hereunder shall automatically
terminate upon the death, disability or insanity of Employee or the bankruptcy
of Employer or the discontinuance of Employer's Business.
5.2 Notwithstanding the termination of this Agreement or of Employee's
employment hereunder, the parties hereto shall be required to carry out any
provision hereof which contemplate performance by them subsequent to such
termination, nor shall such termination affect any liability or obligation which
has accrued prior to such termination, including but not limited to, accrued but
unpaid compensation and any liability for loss or damage on account of default.
5.3 Following any termination of employment hereunder, or notice
thereof; Employee shall frilly cooperate with Employer in all matters relating
to the winding up of his pending work on behalf of Employer and the orderly
transfer of any such pending work to other employees of Employer as may be
designated by Employer. In consideration thereof; Employer shall pay Employee
for any services rendered post-termination at a rate equivalent to the hourly
rate payable to Employee during the Initial Term or the Extension Term, as
applicable, during which the termination occurred.
5.4 Upon termination of this Agreement, or whenever requested by
Employer, Employee shall immediately turn over to Employer all of Employer's
property, including all items used by Employee in rendering services hereunder,
that may be in Employee's possession or under his control.
-3-
<PAGE>
6. Covenant Not to Compete; Disclosure of Information.
---------------------------------------------------
6.1 Solicitation.
-------------
6.1.1 For a period of six months after the date of termination of
this Agreement, Employee shall not, whether alone or as a partner, officer,
director, employee or shareholder (or other holder of an equity interest) of; or
consultant, advisor or lender to, any other corporation, partnership or other
entity, or as a trustee, fiduciary or other representative, solicit Employer's
customers with respect to, engage in or have any interest, including as a
creditor, in any person, partnership, corporation, association, or other
business entity, whether as employee, officer, director, agent, consultant,
stockholder or holder of any right to any form of equity ownership, or
otherwise, that engages in the Business.
6.1.2 Employee shall not, during or for a period of six (6)
months after the term of this Agreement, solicit any employee, sales
representative or independent contractor of Employer for employment by any
person, firm, partnership, corporation, association or other entity for any
reason or purpose allied or related to the Business whatsoever.
6.2 Non Disclosure.
---------------
6.2.1 Employee hereby recognizes and acknowledges that: (i)
Employee will be making use of; acquiring, and/or adding to proprietary
information of a special and unique nature and value relating to and including,
but not limited to, such matters Employer's trade secrets, Systems, procedures,
manuals, confidential reports, lists of suppliers, research and development,
projects, policies, processes, formulas, techniques, know-how and facts relating
to sales, advertising, mailing, promotions, financial matters, customers,
customer lists, purchases or requirements or other methods used and preferred by
Employer in its operations, (ii) the Company will disclose certain proprietary
information to Obligor including, but not limited to, the details of any
statistical or financial data, the operations and structure of the business of
Employer, and manuals, forms, techniques, methods or procedures of Employer used
by or made available to Employee in the course of Employee's employment (the
information referenced to in paragraphs 6.2.1(i) and (ii) above are hereinafter
collectively referred to as the "Proprietary Information").
6.2.2 Employee hereby recognizes and acknowledges that the
Proprietary Information is a valuable, special and unique asset of Employer's
business.
6.2.3 Employee will not at any time, directly or indirectly make
use of, divulge or disclose any of the Proprietary Information or any part
thereof for any purpose whatsoever to any person, firm, corporation, association
or other entity for any reason or purpose whatsoever that has been obtained by,
or disclosed to, him as a result of his relationship with Employer. Immediately
upon request by Employer, Employee shall return to Employer any and all
materials relating to Proprietary Information.
-4-
<PAGE>
6.3 Acknowledgment.
---------------
6.3.1 Employee acknowledges that the covenants contained in this
Section 6 are a material inducement for Employer to enter into this Agreement
and to perform its obligations hereunder and that the services Employee is to
render to hereunder are of a special and unusual character with a unique value
to Employer. Employee acknowledges that it would take at least six (6) months
for Employer to retain and train personnel to replace Employee. Accordingly,
Employee acknowledges that the restrictions contained in this Section 6 are
reasonably necessary for the protection of Employer's business and that a breach
of any such restrictions could not adequately be compensated by damages in an
action at law.
6.3.2 In the event of a breach or threatened breach by Employee
of any provision contained in this Section 6, Employer shall be entitled to
obtain, by posting an appropriate bond, an injunction (preliminary or permanent,
or a temporary restraining order) restraining Employee from the activity or
threatened activity constituting or that would constitute a breach.
6.3.3 In the event of a breach by Employee of any provision
contained under this Section 6, Employer shall be entitled to an accounting and
repayment of all profits, compensation, commissions, remunerations or other
benefits that Employee, directly or indirectly, has realized and/or may realize
as a result of, arising out of or in connection of any such breach.
6.3.4 The remedies provided in this Section 6 shall be in
addition to, and not in lieu of; any and all other remedies of Employer at law
or in equity.
7. Miscellaneous.
--------------
7.1 Notice. Notices required or permitted to be given hereunder shall
be sufficient if in writing and delivered or deposited in the mail, postage
prepaid, certified mail, return receipt requested (or the equivalent in a
foreign country), addressed, if to Employer, at its principal place of business
and, if to Employee, at the address set forth in Employer's employee records or
to such other address as may be designated in writing hereafter by either party
hereto. All notices hereunder shall be effective: (a) five (5) days after
deposit in the mail; or (b) upon delivery, if delivered in person or by
commercial express service.
7.2 Burden. Except as otherwise provided herein, this Agreement shall
be binding upon and inure to the benefit of any successor of Employer and any
such successor shall be deemed substituted for Employer under the terms of this
Agreement. As used in this Agreement, the term successor" shall mean any person,
firm, corporation or other business entity which at any time, whether by merger,
purchase or otherwise acquires all or substantially all of the assets or
business of Employer.
7.3 Entire Agreement. This Agreement contains the entire agreement and
understanding by and between Employer arid Employee with respect to the
employment of Employee and no representations, promises, agreements or
-5-
<PAGE>
understandings, written or oral, not contained herein shall be of any force or
effect. No change or modification of this Agreement shall be valid or binding
unless it is in writing and signed by the parties intended to be bound. No
waiver of any provision of this Agreement shall be valid unless it is in writing
and signed by the parties against whom the waiver is sought to be enforced. No
valid waiver of any provision of this Agreement at any time shall be deemed a
waiver of any other provision of this Agreement at such time or any other time.
7.4 Arbitration. In the event any dispute or controversy arising out
of this Agreement cannot be settled by Employer and Employee, such controversy
or dispute, at the election of either Employer or Employee, by written notice to
the other, may be submitted to arbitration in Phoenix, Arizona, and for this
purpose Employer and Employee each hereby expressly consent to such arbitration
and such place. In the event Employer and Employee cannot, within 15 days
following the election to submit the dispute or controversy to arbitration,
mutually agree upon an arbitrator to settle their dispute or controversy, then
Employer and Employee shall each select one arbitrator and the two arbitrators
shall select a third arbitrator. The decision of the majority of said
arbitrators shall be binding upon Employer and Employee for all purposes, and
judgment to enforce any such binding decision may be entered in the Superior
Court, Maricopa County, Arizona (and for this purpose Employer and Employee
hereby irrevocably consent to the jurisdiction of said court). If either
Employer or Employee fails to select an arbitrator within fifteen (15) days
after written demand from the other party to do so, then the Chief Judge in the
United States District Court of the District of Arizona shall select such other
arbitrator. At the election of either Employer or Employee, all arbitrators
shall be selected pursuant to the then existing rules and regulations of the
American Arbitration Association governing commercial transactions. At the
request of either Employer or Employee, arbitration proceedings shall be
conducted in the utmost secrecy. In such case, all documents, testimony and
records shall be available for inspection only for purposes of the arbitration
and only by either party and their respective attorneys and experts who shall
agree, in advance and in writing, to receive all such information in secrecy. In
all other respects, the arbitrators shall conduct all proceedings pursuant to
the Uniform Arbitration Act as adopted by the State of Arizona and the then
existing rules and regulations of the American Arbitration Association governing
commercial transactions. The costs of the arbitration and the arbitrators shall
be borne by the non-prevailing party, as determined by the arbitrators, and each
party shall bear their own attorneys' fees.
7.5 Prohibition Against Assignment. This Agreement is personal to
Employee and Employee shall not assign or delegate any of his rights or
obligations hereunder without first obtaining the written consent of Employer.
7.6 Governing Law. This Agreement shall be governed in all respects
whether as to validity, construction, capacity, performance or otherwise by the
laws of the State of Arizona. The section headings used in this Agreement are
included solely for convenience and shall not affect or be used in connection
with the interpretation of this Agreement.
-6-
<PAGE>
7.7 Severability. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any one or more of the
provisions of this Agreement shall not affect the validity and enforceability of
the other provisions.
IN WITNESS WHEREOF, the parties have executed this document to be effective
the date first above written.
EMPLOYEE: EMPLOYER:
GUM TECH INTERNATIONAL, INC.,
/s/ Jeffrey L. Bouchy By: /s/ Gerald Kern
- - -------------------------- ---------------------------
JEFFREY L. BOUCHY Gerald Kern, President
-7-
Termination of Engagement Agreement
For good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, and to accommodate the mutual requests and desires of
Mayday, Inc., a California corporation ("Mayday"), and Gum Tech International,
Inc., a Utah corporation (the "Company"), Mayday and the Company hereby agree as
follows:
1. Termination of Engagement Agreement. Mayday and the Company do hereby
voluntarily and mutually elect to cancel and terminate, effective January 1,
1997, Mayday's engagement pursuant to that certain Engagement Agreement, dated
February 1,. 1996 (the "Engagement Agreement"). From and after the date hereof,
Mayday is discharged and released from all of its duties and obligations under
the Engagement Agreement.
2. Release. In consideration of the mutual promises herein contained:
2.1 The Company, on behalf of itself and its successors, assigns,
subsidiaries, affiliates, shareholders, directors, officers, representatives,
and agents (collectively, the "Company Group"), hereby releases and discharges
Mayday, its successors, assigns, subsidiaries, affiliates, shareholders,
directors, officers, representatives, agents and all others claiming by or
through or associated in any respect with any of the foregoing (collectively,
the "Mayday Group") from any claim, cause or right of action of any kind, type
or nature, known or unknown, accrued or yet to accrue, which the Company Group
may possess, acquire, or otherwise have or obtain against any or all of the
Mayday Group arising out of or related to the Engagement Agreement and Mayday's
engagement thereunder or cancellation of the same and the parties' dealing with
respect to any and all of the foregoing.
2.2 The Mayday Group does hereby release and discharge the Company
Group from any claim, cause or right of action of any kind, type or nature,
known or unknown, accrued or yet to accrue, which the Mayday Group may possess,
acquire, or otherwise have or obtain against any or all of the Company Group
arising out of or related to the Engagement Agreement and Mayday's engagement
thereunder or cancellation of the same and the parties' dealing with respect to
any and all of the foregoing.
2.3 Notwithstanding any provision of this Agreement to the contrary,
all claims of a party hereto against the other party arising from breach of or a
default under any term or provision of this Termination of Engagement Agreement
(this "Agreement") are expressly reserved and they are not subject to the mutual
release provided for in this Section 2.
3. Indemnification. Mayday hereby agrees to indemnity and hold the Company
Group harmless from and against any and all liability of any nature whatsoever,
including, without limitation, attorneys' fees, that the Company or any member
of the Company Group may incur or suffer as a result of or arising out of or in
connection with Mayday's: (a) performance of its obligations under the
Engagement Agreement or (b) the promotion of the Company in it's capacity as an
agent of the Company.
<PAGE>
4. Miscellaneous Provisions.
4.1 This Agreement contains the entire agreement and understanding by
and between the Company and Mayday with respect to the termination of the
parties' relationship with respect to the Company and no representations,
promises, agreements or understandings, written or oral, not contained herein
shall be of any force or effect.
4.2 No change or modification of this Agreement shall be valid or
binding unless it is in writing and signed by the parties intended to be bound.
4.3 No waiver of any provision of this Agreement shall be valid unless
it is in writing and signed by the parties against whom the waiver is sought to
be enforced. No valid waiver of any provision of this Agreement at any time
shall be deemed a waiver of any other provision of this Agreement at such time
or any other time.
4.4 This Agreement shall be governed in all respects whether as to
validity, construction, capacity, performance or otherwise by the laws of the
State Arizona, without giving effect to its choice of law principles.
4.5 In the event that any one or more provisions of this Agreement
shall for any reason be held to be unenforceable in any respect under applicable
laws, such unenforceability shall not affect any other provisions of this
Agreement, but, with respect only to that jurisdiction holding the provision to
be unenforceable, this Agreement shall then be construed as if such
unenforceable provision or provisions had never been contained herein.
4.6 The losing party shall pay all attorneys' fees arid costs incurred
by the prevailing party in any proceeding to enforce the provisions of this
Agreement, whether the same are incurred in preparation for or in pursuit of
litigation, or both, all as equitably determined by the applicable court.
4.7 This Amendment may be executed in any number of counterparts and
each such executed counterpart shall constitute one and the same instrument. The
parties agree that signatures received via facsimile transmission shall in all
respects be deemed to be original signatures.
In witness whereof; this Agreement has been executed by the Company and Mayday.
Gum Tech International, Inc., Mayday, Inc.,
a Utah corporation a California corporation
By: /s/ Gerald Kern By: /s/ Roy Kaplan
----------------------- ----------------------------------
Gerald Kern, President Roy Kaplan, President
2
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,116,751
<SECURITIES> 0
<RECEIVABLES> 788,872
<ALLOWANCES> 35,000
<INVENTORY> 1,366,944
<CURRENT-ASSETS> 4,342,667
<PP&E> 3,597,885
<DEPRECIATION> 459,403
<TOTAL-ASSETS> 8,210,624
<CURRENT-LIABILITIES> 687,332
<BONDS> 0
0
0
<COMMON> 7,965,060
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 8,210,624
<SALES> 3,868,642
<TOTAL-REVENUES> 3,868,642
<CGS> 2,070,443
<TOTAL-COSTS> 2,070,443
<OTHER-EXPENSES> 364,728
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 219,668
<INCOME-PRETAX> (2,868,266)
<INCOME-TAX> (232,371)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,635,895)
<EPS-PRIMARY> (.60)
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</TABLE>
